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Insolvency

Formal Personal Insolvency – Debt Agreements

This is the first summary of a three-part series looking at the benefits and disadvantages of formal insolvency procedures for dealing with personal insolvency from the debtor’s perspective.

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Formal Personal Insolvency Series – Part 1 – Part IX Debt Agreements

The procedures for Debt Agreements are set out under Part IX of the Bankruptcy Act, 1966 and are designed to deal with debtors’ affairs that are smaller in terms of the debts due and the assets they may own. For a better term, it is for the retail debtor with financial problems.

For a debtor’s affairs to be dealt with under Part IX, the debtor’s assets and liabilities cannot exceed regularly adjusted thresholds. Presently, the thresholds are $236,126.80 for assets and $118,063.40 for liabilities. The debtor’s after-tax income can not exceed $88,547.55 for Part IX to apply.

Compared to other formal insolvency procedures in this country, this is a simple, streamlined procedure cheaper to administer and obtain approval from creditors.

On the lodgment of a proposal with AFSA, any creditor’s legal action against a debtor is put on hold whilst the procedure runs its course until creditors have made their decision. Such activities include Bankruptcy Petitions, garnishees and levying of execution.

Suppose the proposal for a Debt Agreement receives the requisite vote for approval by the deadline, which voting can and usually is done by mail. In that case, all creditors are bound, including those who voted against the proposal and cannot act against the debtor whilst the debtor complies with the Debt Agreement and the Agreement remains on foot.

The debtor does not have to go bankrupt, but the Debt Agreement is still listed on the Credit Agency databases. The debtor has also not had to face their creditors at a creditors’ meeting, which can be a traumatic experience for many.

Providing the terms of the Debt Agreement are complied with, the process gets the creditors permanently off the debtor’s back. The usual income contribution approach is calculated sensibly and can run for however long or short creditors are prepared to wear.

If creditors do not approve a proposal, an amended proposal can be lodged for approval. With creditor approval, mechanisms are in place to enable Debt Agreements to be varied if circumstances change during the Debt Agreement term.

Conversely, unlike bankruptcy, there is no provision to review a debtor’s income if the situation has improved. In contrast, the income contributions issue is revisited annually for the three years of bankruptcy.

In a bankruptcy, assets divisible property devolving on default during the usual three years become property that can be divided amongst creditors, whereas this does not occur under a Debt Agreement.

Where there is a fundamental property in a debtor’s estate but no equity, it would stand outside a Debt Agreement. Under bankruptcy, a caveat is usually placed on the property, and any equity that may accrue in the property within roughly nine years from the commencement of bankruptcy would likely end up in the pockets of the creditors.

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