Notice of Intention to Declare a Debtor's Petition
Subject to certain exceptions a debtor may present to the Official Receiver a declaration to present a debtor's petition [Bankruptcy Act 1966 s 54A]. Once accepted this has the effect of freezing action against the debtor by a creditor for a period of 21 days. This allows a debtor time to seek advice or make arrangements with creditors and prevent the need to become bankrupt. These arrangements have no effect on the rights of secured creditors to deal with their security. A declaration is not available to business partners and can only be filed once in any twelve month period.
It is possible to negotiate arrangements with creditors to repay certain debts over a period of time. Dealing with debt in this way requires some skill, and it is best to consult a financial counsellor, or lawyer or accountant to put a realistic and manageable proposal to persuade creditors to accept something like a reduced lump sum or a long term instalment arrangement. Creditors may ask to be informed of your complete financial position, including other creditors, to ensure that any proposal is fair. Clearly entering into such an arrangement avoids the stigma and consequences of bankruptcy, although it is likely that creditors may make an adverse credit report which will remain on your credit file for a period of 5 years.
The Bankruptcy Act offers other alternatives that are legally binding, but do not have some of the same effects as bankruptcy.
A Part IX Debt Agreement is a legally binding agreement between a debtor and their creditors. Entering into a Debt Agreement is an act of bankruptcy, but is not the same as being made bankrupt. With the assistance of a Debt Agreement administrator, a proposal needs to be submitted to Australian Financial Security Authority (AFSA) for approval before being put to a person's creditors. A debtor must be insolvent (unable to pay debts as and when they fall due) in order to put forward a proposal to enter into a Debt Agreement.
The proposal to an insolvent person's creditors is determined based on an analysis of expected income from all sources, household expenses and circumstances. The debtor must prepare an achievable and sustainable offer to their creditors.
AFSA ensures proposals comply with the wide range of requirements such as eligibility, ensuring creditors are well informed and conducting the voting process with creditors.
AFSA also maintains the National Personal Insolvency Index (NPII) to ensure it reflects the status of the agreement. In order to be eligible to put up a Debt Agreement:
- A person's income must be below a certain threshold;
- The debts must be below a certain threshold; and
- The person must not have been made bankrupt in the past 10 years.
The threshold amounts are set out on the AFSA website.
Once approved by AFSA, the Debt Agreement proposal is sent to creditors to vote on. A proposal is accepted if a majority of creditors (by reference to the value of the debts) vote in favour of the debtor's proposal.
Some examples of the kinds of proposals offered are:
- Periodic payments of amounts out of the debtor's income to creditors, equal to or less than the full amount of all the debtor's provable debts
- Lump sum payment of less than the full amount of all the debtor's provable debts
- A moratorium on payments of debts to allow the realisation of property to raise money to pay creditors
- Payment from the proceeds of sale of property owned by the debtor
All creditors with provable debts at the time the debtor's details are entered into the NPII are bound by the agreement, even those who voted against the proposal. Creditor's debts are fixed at the date the proposal was entered on the National Personal Insolvency Index (NPII). Interest does not accrue and creditors cannot take or continue action against the debtor to collect their debts.
The debtor is liable for further debt incurred after AFSA accepts the proposal to send to creditors for voting.
Debtors who wish to lodge a Debt Agreement must engage an administrator who will charge a fee. In addition, there is a cost to lodge the proposed agreement with Australian Financial Security Authority (formerly ITSA) for approval. A reasonable offer should be made as AFSA do not have to accept the proposal for processing unless it is in the best interests of creditors. AFSA looks at how much creditors will receive from the proposal and how much they would get if the debtor became bankrupt. Relevant considerations will include the debtor's income and assets, see Effects of bankruptcy.
If AFSA accepts the proposal for processing, creditors are provided with a copy of the proposal and given 25 working days to accept or reject the proposal. The proposal becomes a debt agreement if accepted by a majority in number and three quarters in dollar value of creditors responding by post.
The effect of a debt agreement is:
- During the debt agreement creditors cannot take action to recover their provable debts
- If the debtor does not make payments the debt agreement may be terminated and the creditors can resume collection of their debts
- The debtor's details will appear on the National Personal Insolvency Index (NPII) from the date that the debt agreement proposal was accepted by AFSA to send to creditors for their vote
- The debtor's details are recorded by credit reporting agencies
- The debtor's credit rating will be affected and they will find it difficult to obtain further credit
- The debtor may have to pay bonds for insurance, electricity and telephone access
- Secured creditors' rights are not affected and they may repossess if the debtor is in default
Whilst a debt agreement is in place and details are recorded on the NPII a creditor cannot:
- Present a creditor's petition against the debtor; OR
- Proceed further with a creditor's petition presented before details of the debt agreement were entered on the NPII; OR
- Enforce any remedy against the debtor's person or property or take a fresh step in legal proceedings in respect of a provable debt; OR
- A sheriff must not take action to execute or sell property under a court process to enforce payment of a provable debt; OR
- Enforce a garnishee or other law to retain or deduct money from wages.
Once an agreement has been accepted it gives the debtor the same protection as bankruptcy in relation to action by creditors. Action can still be taken in relation to the payment of child support.
Jointly owed debts are not extinguished by a debt agreement - a creditor can pursue the other joint debtor for the debt.
This alternative will be particularly attractive for people with relatively few debts, low income and few assets.
Personal Insolvency Agreements
A Personal Insolvency Agreement is similar to a Debt Agreement, except that there are no limits on income and assets owned by the debtor, and no limits on the total debt owed. The PIA is managed by a controlling trustee, and involves investigation of a debtor's financial position by the trustee, who then calls a creditors meeting to allow the creditors to vote on any proposal. If the proposal is rejected, any creditor is free to make the debtor bankrupt (through a creditors petition) or let the debtor lodge their own petition.
This alternative is more suitable for people with unmanageable debts, but a high income and a number of assets.
The effect of a PIA is similar to a debt agreement:
- It is an act of bankruptcy which allows a person to apply to a Court for a sequestration order if the PIA fails;
- It is recorded on a person's credit report and on the NPII
- Requires co-operation with the controlling trustee
Further detailed information about PIAs can be found here.
Bankruptcy is generally a last resort. However, it can have some advantages, for example:
- Most debts are extinguished. Once a bankrupt is discharged, provable debts incurred before the date of the commencement of the bankruptcy are automatically and totally cancelled with a few exceptions, see debts.
- When people enter bankruptcy, some of their property comes under the protection of the Act and cannot be taken away to help pay their debts [Bankruptcy Act 1966 (Cth) s 116, Bankruptcy Regulations 1996 (Cth) regs 6.03 and 6.04]. This includes necessary household furniture and a primary means of transport eg motor vehicle or motorbike worth less than then indexed amount, see property a bankrupt can keep. This means that most ordinary household items can be kept by the bankrupt.
- a person cannot be pursued by creditors once the person enters bankruptcy [s 58]. All further communications about the debts should take place between the bankrupt's creditors and trustee.
- social security payments are protected under the Act.
- The trustee will ask a bankrupt to pay part of his or her income if there is money left over after allowing for all ordinary living expenses, such as rent, food, clothes, and even pocket money for children unless assessed as a compulsory contributor, and then in accordance with the legislation. As many people entering bankruptcy have been paying large portions of their income to creditors, this can be a great relief.
People who become bankrupt also face many disadvantages, for example:
- bankrupts receiving over a certain income must pay contributions during the bankruptcy (but not from social security payments), and this amount is indexed. For up to date information regarding the amount see the table on the AFSA website here See also income.
- the bankruptcy may be published in trade journals or a newspaper, and information is available on a searchable register called National Personal Insolvency Index (NPII). Information can be obtained by anyone who pays a search fee (including a copy of an extract). More information on searching the NPII is available on the AFSA website.
- money and valuable goods (with certain exceptions) owned or being paid off at the date of bankruptcy, or acquired during the bankruptcy, will vest in the Trustee and be available for the Trustee to sell to pay creditors
- a payment made to a creditor within six months before the filing of a debtor's petition and potentially a longer period under a creditor's petition, which gives that creditor a preference over other creditors, is void and may be recovered by the trustee and distributed to all the creditors [Bankruptcy Act 1966 s 122].
- it is an offence against the Bankruptcy Act 1966 for a bankrupt to borrow, or write a cheque for an indexed amount (see AFSA website for details of the amounts) or more without informing the other person of the bankruptcy [Bankruptcy Act 1966 s 269(1)(a)]
- bankrupts who do not co-operate with their trustees by fulfilling certain duties (such as notifying details of earnings and changes of address) may be punished by the court or have their bankruptcy extended
- former bankrupts are likely to have difficulty in obtaining credit in the future
- the bankruptcy is likely to last for three years. If the trustee lodges an objection which is not withdrawn, the bankruptcy will last for five or eight years, see ending bankruptcy.
- under the Corporations Act 2001 (Cth) [s 206B(3)] a current bankrupt cannot be a director, promoter, or manager of a company without the permission of the court
- a bankrupt may operate a business (not a company), but if a business or assumed name is used, every person with whom they have dealings must be told of their bankruptcy and real name [Bankruptcy Act 1966 s 269(1)(b)]. Any assets acquired by the business may be claimed by the trustee
- in some situations the court can order that the property of an entity (eg a company, trust or partnership) controlled by a bankrupt vest in the trustee. This may occur where the bankrupt was unable to pay his or her debts and provided personal services for, on behalf of, the entity [ss 139D, 139E]
- a bankrupt may have committed a criminal offence if, within two years before going bankrupt, the person gambled or speculated in a rash and hazardous way in light of the person's financial position at that time [Bankruptcy Act 1966 s 271]. The penalty is gaol for up to one year
- a person cannot hold a licence for some trades while bankrupt. For example, a building licence cannot be held for two years after becoming insolvent (five years if a person was a director of a wound up corporation) [s 9(1)(c) of the Building Work Contractors Act 1995 (SA)]
- the Second-hand Dealers and Pawnbrokers Act 1996 (SA) [s 6], prohibits bankrupts and people who are subject to a composition or deed or scheme of arrangement from being second-hand dealers or pawnbrokers.
- the Plumbers, Gas Fitters and Electricians Act 1995 (SA) [s 9(1)(c)], prohibits bankrupts and people who are subject to a composition or deed or scheme of arrangement from holding a licence to practice as a plumber, electrician or gas fitter.
- a person can be employed as a real estate sales person, but cannot hold a real estate licence under the Land Agents Act 1994 (SA) [s 8(1)(d)] if bankrupt or subject to a composition, deed or arrangement.
The content of the Law Handbook is made available as a public service for information purposes only and should not be relied upon as a substitute for legal advice. See Disclaimer for details. For free and confidential legal advice in South Australia call 1300 366 424.