Written by Robert Kite in September, 2007

Part X of the Act (Personal Insolvency Agreements) has been a part of Bankruptcy Law for decades. Part IX of the Act (Debt Agreements) came into effect in December 1996. Debt Agreements are sometimes referred to as a “Poor Mans Part X”, as to be eligible to utilise Part IX of the Act, you are subject to certain limitations as to your level of income, assets and level of creditors (which will be discussed later).

The main purpose of both Personal Insolvency Agreements and Debt Agreements is to provide the debtor, and creditors, with the opportunity to determine the manner in which a debtor’s affairs may be administered without the need to go bankrupt.

In the absence of Personal Insolvency Agreements and Debt Agreements, the only alternative to bankruptcy would be to come to an informal arrangement with ones creditors. The main problem of informal arrangements is that it only takes one creditor to object to any such arrangement and to bankrupt the debtor. Personal Insolvency Agreements and Debt Agreements provide the statutory framework to enable these arrangements to be enacted, and to bind all creditors to the agreement.

As it is ultimately the decision of creditors as to whether the debtor’s proposal is accepted, it is a general view that in order for a debtor’s proposal for a Personal Insolvency Agreement or a Debt Agreement to be accepted, the proposal needs to provide a greater return to creditors than the alternative of bankruptcy would provide.

The further benefit of Personal Insolvency Agreements or a Debt Agreements (for reasons to be discussed later) is that it can provide a more cost effective manner in which to deal with the debtor’s affairs.

Form a statistical point of view, Personal Insolvency Arrangements comprised 14% of all appointments recorded by the Insolvency and Trustee Service Australia (“ITSA”) in 1987. In 2006, Personal Insolvency Agreements only accounted for 0.6% of all appointments recorded by ITSA in 2006

In the year of its inception, Debt Agreements accounted for .2% of total appointments recorded by ITSA. However, by 2006, Debt Agreements accounted for 17.8% of all appointments recorded by ITSA.

The statistics speak for themselves as to the decline in the use of Personal Insolvency Agreements and the increase in the use of Debt Agreements. Such usage of Debt Agreements is reflective of the fact that the system was introduced to counter the large level of “consumer bankruptcies’, that is, those bankruptcies which are not a result of failed business ventures.

When establishing the Part IX regime, it was acknowledged that the parties who were to be eligible to use the scheme were of limited asset holdings and limited income. Owing to the limited resources available to such parties, it is necessary to keep the costs associated with Debt Agreement as low as possible, so as to enable the greater level of resources to be available to creditors. Accordingly, the regime of Part IX has been legislated so that it is cost effective.

To keep a cost effective structure, Debt Agreements are only available to people who satisfy certain criteria. A person is disqualified from entering into a Debt Agreement in if:-

(a) At any time in the last 10 years the debtor has been bankrupt, or the debtor has entered into a debt agreement (as the debtor), or has executed an authority under Section 188 of the Bankruptcy Act; or

(b) The total of the debtor’s unsecured debts are likely to exceed the threshold amount. At the time of preparing this paper, the threshold is $75,075 ; or

(c) The value of the debtors divisible property exceeds the threshold amount ($75,075); or

(d) The debtor’s after tax income in the year beginning at the proposal time is likely to exceed 75% of the threshold amount. At the time of preparing this paper, 75% of the threshold is $56,306.

A debtor who is not excluded as a result the above, can submit a proposal, along with the other statutory documentation to be submitted to the Official Receiver for a Debt Agreement.

In setting the above thresholds, it is acknowledged that such parties may be less likely to have been involved in any form of antecedent transactions which would be commercial to pursue if the debtor were to go bankrupt. Accordingly, the level of investigation required in determining the benefits of a proposed debt agreement, against the possibility of Bankruptcy may not need to be as in-depth. Therefore, the costs of attending to same would, in most cases, be lower than those costs which may be incurred in investigating the conduct of an individual who seeks to enter into a Personal Insolvency Agreement.

Part X and Part IX provide an alternative to Bankruptcy for debtor and creditor alike. The main limitations of Part X of the Act is due to the level of costs involved in order to enact a Personal Insolvency Agreement. Debt Agreements have been established to counter consumer bankruptcies, to enable those parties with lesser incomes and lesser asset holdings an alternative to bankruptcy.

As a result of the well planned legislation, Debt Agreements have provided an alternative to bankruptcy to a large number of people who would, in most circumstances not have any other realistic option. It is for this very reason, that Part IX has become so popular.