A Debt Agreement Proposal is an offer to pay your ordinary unsecured debts, generally with all further interest frozen, and with the repayments supposedly being at a rate that you can afford. If it’s accepted by enough of your creditors, it means that you don’t go bankrupt.

A practical problem with debt agreement proposals is that they are over promoted and so in some cases they don’t really work.

In the usual 3, 4 or 5 year term of a debt agreement, it is my observation that people seem to commit themselves to a repayment plan that still stretches their cash flow and so it becomes unrealistic should something happen and the wheels fall off again during the term agreed to. That simply adds to their misery.

Sometimes I’m told by the people who contact me because they find themselves in trouble again that the person selling them the Proposal suggests that they leave this and that creditor out so that it all looks good, but honestly, it all catches up in the end. I don’t go along with leaving this creditor and that creditor out. I don’t need the fee that badly, but it seems that in too many cases the debt agreement salesperson has been too interested in their  commission.

In considering entering into a debt agreement I strongly recommend that you only offer a repayment rate that you should comfortably be able to afford over the period of the agreement.

If you know somebody who is prepared to do this for you on a one off basis, say a relative or a friend, or even yourself, then it seems that that is still possible, and could be more cost effective for you.  However, to get the full picture, please read on.

If there are no major assets at risk, or something like a company directorship to be considered, it is my view that a lot of people could achieve a similar result to what they are trying to achieve simply by going bankrupt. Then after bankruptcy, although at law they don’t have to, and so you can’t be under any pressure to do so at any time, you could voluntarily continue to pay the creditors, but at a rate and over a time period that you can really afford.

I cover this in Frequently Asked Questions.

However, do read on as this Information Note gives a lot of information on debt agreements which will be helpful to you if you decide that the debt agreement route is best for you.

Debt Agreements have been put into place by the government as an alternative to going bankrupt. It is covered by Part 9 (Part 1X) of the Bankruptcy Act so it is sometimes referred to as a Part 9 Debt Agreement Proposal, or just simply a Part 9.

A Debt Agreement is a bit like a consolidation loan from a bank, because all of your unsecured debt is lumped into one. However unlike trying to get a bank loan, to put a Debt Agreement in place you don’t need any security, and it doesn’t matter what your credit rating looks like.

If you lodge a Debt Agreement Proposal and it is rejected by creditors, you can then lodge a new one.  I don't know how many times you can do this. After deducting the out of pocket type costs and the Debt Agreement Administrator’s fees, mostly the creditors ultimately end up receiving less than you owe them.

If your offer under a Debt Agreement Proposal is accepted by enough of your creditors, then provided that you keep your end of the bargain, you don’t go bankrupt, and you get out of debt. It also gives you the same protection from your ordinary unsecured creditors as bankruptcy does in that they then cannot garnishee your wages, nor send the sheriff around to seize your property to sell. They’re also prevented from ringing you up and harassing you.

A Debt Agreement Administrator’s ongoing fee is generally part of the weekly, fortnightly or monthly payment that you’ll make to the Proposal, they’re not additional. Often they are a % of what you pay into the scheme, so sometimes I question whether this really makes the person advising on a Debt Agreement Proposal independent.

The government is also imposing a tax on the monthly payments made on debt agreements, to come out of the payments made.

Most Debt Agreement Proposal offers are to freeze your debt so that no more interest or charges are added on by the creditors (the banks etc). In addition, after the Debt Agreement Proposal administrators fees and your matter’s out of pocket expenses are paid, in most cases your creditors will be prepared to accept a repayment to them of less than what you owe them.

With a reasonable and sensible Debt Agreement Proposal offer being received from you, it puts your creditors somewhere between a rock and a hard place a bit. If they reject a reasonable and practical offer, your alternative is that you might declare yourself bankrupt, and so they’ll mostly then get nothing.

Even so, it’s surprising how many creditors reject what seems to me to be a realistic and practical proposal. I’ve even seen the same company, where the client had 2 separate loans with the one finance company, have that same company say yes on one of the cards and no on the other, to the same proposal.

The parameters put into place by the government for a Debt Agreement Proposal are that it is for people who expect, in the next 12 months, to have an after tax income of about $60,196.50, who have ordinary unsecured debt of no more than $80,262.20 and with net assets of no more than $80,262.20. (These are the amounts current at April 2008, they could be changed each March and September, with indexation).

I often come across people with overwhelming debt who are being harassed to death by the debt collectors, or they can see what’s coming, and although it’s an option, for their own particular reasons many of them tell me that they simply do not want to go bankrupt.

I’m often told that if they were given time, some of these people can see better days ahead, so they feel that bankruptcy could be a bit disastrous. I hear of examples like, say, they expect to be a beneficiary in a will soon, and they do not want to lose that benefit, or have their own financial troubles impact on other people.

Some people see that with bankruptcy they could lose the immediate benefit of any redundancy pay or long service leave etc. and they’d rather that didn’t happen.

Others are worried about losing their assets, particularly their house. (see Bankruptcy Information Note 4 about houses.). These days losing your house on bankruptcy is not necessarily a foregone conclusion.

Also, some are concerned because bankruptcy affects a person’s capacity to hold certain company positions like directorships etc.

Entering into a Debt Agreement Proposal does not have these restrictions.

A Debt Agreement Proposal places no restrictions or hassles on you as regards overseas travel. As a bankrupt, if you wish to travel overseas then you have to get the permission of your bankruptcy trustee first. Whilst there is a procedure to be followed to get this permission, it does not seem to present too many difficulties. This topic is covered in more detail in Bankruptcy Information Note 4.

Like most of us, some people just say that they want to pay their debts no matter what, but that the debt collectors and the banks just put unreal demands on them, and so make that impossible.

It seems to me that in many cases the so called debt collectors can be viewed as salesmen selling nothing more than second hand debts.

Have you found that the person harassing you isn’t from the place where you thought that you owed the money to, but they’re from a somewhere that has bought the debt off the organisation that you originally owed the money to?

If this is the case, and sometimes you don’t even know it because they may not have told you, (next time they call, seek this information out) then the person calling you is from an organisation that specialises in buying debts off the original place that you owed the money to. In the industry, your debt is often on-sold on for a very low % of what you owed, say 10 cents in the dollar, maybe a bit more, maybe a bit less.

As an example of what is published in the public domain on this subject, in the 2005 year Annual Report to shareholders, the company Collection House Limited, the Chief Executive Officer’s Report stated “during the year we bought quality debt ledgers with a face value of $325.6m for an outlay of $43.4m.”

That’s an average of 13.33 cents in the dollar.

The report also stated “we implemented a future vision package of initiatives that included introduction of an important Customer Notice of all Lion Finance debt purchase correspondence to inform customers of their rights and obligations”.

I think that that’s great, and I hope that soon all other companies who have bought debt at a reduction to its face value, do something similar. I think that you’ve got a right to know, and I compliment Collection House for taking this initiative.

I’d also like to think that the banks and others who have on-sold our debt will also have had recorded on our credit rating record with the commercial credit rating agencies (your CRAA record) that the debt to them has been settled. That would simply be disclosure of a true fact.

Now, think about it this way, the person calling you isn’t collecting the debt that you owe, because that’s been paid by the above 10 or 20 cents in the dollar. The place that you owed the money to has been paid. They decided to take less than what you owed, in full and final payment, and written the rest off. The balance written off has become a tax deduction to them, most likely saving them 30 cents in the dollar.

If your debt has been sold then the person now ringing you has really only got a second hand item to sell, and his difficulty is that there’s only going to be one possible buyer, you (although from feedback I’m sometimes told that the debt appears to have been on-sold more than once).

It’s like as if the person ringing you was trying to sell a second hand car, and he could only sell it to one person, you.

It’s pretty much the same thing, except the government would probably crack down on second hand car salesmen if they continually phoned and harassed and treated people the way that you know that you are sometimes being verbally assaulted and harassed to death, just because somebody is trying to sell you back a second hand debt that they bought on the cheap.

If you now can see the picture in a different light, don’t you think that that now puts you in a different position, a better negotiating position? The second hand debt salesman might now find that he’s flogging a dead horse. Whilst you still want to pay your debts, but at a rate and over a time frame that you can afford, your repayment offer may now need be considered in a different perspective.

Food for thought?

With a Debt Agreement Proposal the arrangement should be one that you can afford, but quite often it doesn’t turn out that way.

I do come across people who find that a Debt Agreement Proposal was not the answer to their problems at all. I’m sometimes told that the person who saw them about their debt problem really didn’t properly advise them, or at best fudged some figures. So, further down the track the people who find that they still have a debt problem then seek my assistance to really end this nightmare, and so go bankrupt.

Then there’s the archaic so called stigma of bankruptcy. Some people hope that this can be avoided by putting in place a Debt Agreement Proposal.

The other thing about a Debt Agreement Proposal is that it actually locks in what you say that you'll do, and your creditors can't later ask for more, but you can walk away from it at any time and simply decide to go bankrupt later if you change your mind. If the problem is that you’re finding the payments to high, or something like that then your Debt Agreement Proposal administrator can approach your creditors for you and ask that it be amended. The other 25% goes to the people who sold you the debt agreement, and to those who manage it.

As a general statement my observation is that some creditors try to get Debt Agreement Proposal offers, after the Debt Agreement Administrator’s fees and the matters out of pocket expenses come out of the payments made, end up repaying creditors about 75% of the debt, no more interest and no more charges, etc over a three year period, are quite likely to be accepted.

However, if you want to enter into a Debt Agreement Proposal, I encourage you to offer only what you feel that you can afford. As I’ve pointed out before, this may still result in whoever now owns the debt, in making a good profit anyway.

If your heart is set on a Debt Agreement Proposal, then give whatever you can afford a try.

A longer repayment period than 3 years seems to depend a lot on the mix of who the creditors are. My observation is that each one is in their batting for themselves, and themselves alone. Also, as you’ll read later, those who say no may be outvoted by those who will agree, because if the offer that you make is accepted by a certain % of the creditors that you owe money to, it binds the rest of them.

As I mentioned earlier, the government have now got into the act too and are charging a tax on payments that you make on a debt agreement proposal.

Alternatively, sometimes somebody that you know (a grandma) may be prepared to offer the creditors a lump sum of money, less than you owe, if they will take it in full and final payment of your debt, and cancel any balance left owing. The grandma type of offers can be made through a Debt Agreement Proposal.

If your credit rating hasn’t already been damaged for 5 years by the debt collectors having your debt default referred to the credit rating agencies, then a Debt Agreement Proposal will damage your credit rating with the commercial credit agencies for 7 years, the same as if you went bankrupt, and it is recorded on the database kept by ITSA, known as the National Personal Insolvency Index, the NPII, forever. The NPII database can be accessed by the public, for a fee.

How a Debt Agreement Proposal Works.

How a Debt Agreement Proposal works is that the paperwork for an offer is prepared and in it you name somebody to be your Debt Agreement Proposal Administrator. Once all of the paperwork has been signed it is submitted to ITSA. ITSA will check the documentation and if it's correct they then send it to your creditors. You don't have to.

The creditors are asked to vote by mail as to whether they'll accept your offer or not. With a Debt Agreement Proposal, or a variation to one, they have 35 days to vote unless the DAP was sent for voting in December, when creditors have 42 days. In relation to a proposal to terminate a debt agreement, creditors have 14 days to vote unless it was sent to them in December, in which case they have 21 days.

At the end of this 35 day period, ITSA counts the votes. Every creditor who responds correctly is given one vote for each dollar of debt that they are allowed to vote for. A creditor has 1 vote for every dollar that ITSA accepts that they are owed.  A simple majority of votes counted decides whether or not a debt agreement proposal is accepted or rejected. 

An interesting point about secured creditors.  Say you owed XYZ Car Finance Company $20,000 still on a secured car loan, but the wholesale value of the car was now only $16,000.  XYZ Car Finance Company would be able to vote on the $4,000 difference.

If you get enough votes in favour in both categories, then the proposal is carried. Creditors who did not send their responses back, or who voted against the proposal, have to accept the result as binding.

Your Debt Agreement Administrator would then get the procedures and the paperwork sorted out. You would start paying by direct debit to the bank account advised by your Debt Agreement Administrator the amount of your agreed contribution. The administrator would take their fee, and then pay the creditors from what’s left.

If over whatever period has been agreed upon you keep your end of the bargain, then that’s the end of the matter.

There are a few interesting things with the creditors' rights to vote on whether or not to accept your offer. Some of you by now have discovered that whereas you thought that you owed say a bank for your debt, another company has now bought your debt off the bank and so you now owe this other company the money, not the bank any more.

If this new company has paid less for your debt than what you owed on it, then although you'll have to put down the full amount as owing in the Debt Agreement Proposal paperwork, because you'll still legally owe the full amount of the debt, in fact the new creditor can only be counted for the amount that they paid for the debt. Here's an example of what this can mean.

On the surface you, may think that you owe creditor X, a credit card company $10,000. However, sometimes the creditor Xs of this world sell slow and hard to collect loans to somebody like a debt collection house for a fraction of the debt, say 20 cents in the dollar. In this scenario then the debt that the debt collection house can collect off you is $10,000 even though they only paid $2,000 for it.

In the voting on a Debt Agreement Proposal offer however, although you owe the $10,000 to the debt collection house, as they've only paid $2,000 for it, in the voting on a Debt Agreement Proposal, they can only vote 2,000 times.

If you've got two other friendly creditors, to whom you genuinely owe $5,000 each, so they both are creditors, they can each vote yes. From them you'd have 2 yes votes for the numbers and $10,000 yes dollar votes.

With the debt collection company, who now votes instead of creditor X, because they only paid $2,000 for the debt, then they can only cast 2,000 dollar votes so that in this scenario, your friendly creditors would outvote the second hand debt salesman's votes. So in this scenario, it is really immaterial how creditor X, the debt collection house, votes.

Sometimes the company that bought your debt won’t even vote, presumably because they’d have to divulge what they paid for it, and this could be sensitive commercial information that their competitors could find useful.

Under this scenario, if you offered less than 100 cents in the dollar as your Debt Agreement Proposal offer, say 40 cents in the dollar, then even after the administration costs of managing your Proposal are taken into account, creditor X should still receive more back than it paid for your debt, and your 2 friendly creditors have received something back rather than a possible nothing which might have been the case if you had simply gone bankrupt.

In all of this you might have noted that it is not necessary to tell your employer.

Cancelling or Changing a Debt Agreement Proposal.

As I’ve said earlier, I sometimes get contacted by people who have already entered into a Debt Agreement Proposal and now find that keeping up the repayments is still too hard, and so they ask me what they can do. If your 3 months behind in your payments under the DAP, your administrator has to start taking action.  He has to report this to your creditors, and down the track the creditors can move to have the whole thing cancelled. 

Before this happens, you can ask your Debt Agreement Proposal Administrator to contact creditors to see if they would agree to you changing the repayment schedule or term.

Alternatively, you can cancel the Debt Agreement Proposal simply by writing to ITSA, the government department in charge of debt agreements and advising that you do not wish to continue on with the Proposal and that you now wish to have it cancelled.

Then go and cancel your bank authority for the payment to the Debt Agreement Administrator.

ITSA will then write to all of the creditors covered by your Debt Agreement Proposal and ask those creditors if they agree that the Proposal be cancelled. Their replies are subject to the same 14 days, or 21 in December and voting percentages scenario covered previously. At the end of the period ITSA will again count the votes and if enough creditors agree, everybody will be advised that the Proposal has been cancelled. The creditors can then recommence to pursue you through the normal debt collection practices.

If payments under a debt agreement fall 6 months behind, it is then automatically terminated. 

Interestingly enough, even though you’ve stopped making payments, the creditors cannot recommence taking actions like garnisheeing your wages or sending the sheriff around to pick up your lounge and TV etc until it is known whether your Debt Agreement Proposal has been cancelled or not.

I am told from time to time that sometimes a Debt Agreement Administrator tries to get people to change their minds about cancelling the Proposal. Whilst a Debt Agreement Administrator has no power or authority to stop you from requesting that the Proposal be terminated, it seems that in trying to get some people to change their minds, some fairly inaccurate claims are made about, for example, a bankrupt’s ability to travel in Australia or overseas whilst bankrupt, or their income status (see Information Note 1 on this website), or the damage that bankruptcy will do to the person’s credit rating.

As a bankrupt you can travel anywhere in Australia, at will. To go overseas you first need the permission of your bankruptcy trustee. I cover this topic in Bankruptcy Information Note 4 on this website.

Claims made to you to convince you not to cancel your proposal could merely be an attempt at protecting a Debt Agreement Administrator’s fees.

With assets, with a Debt Agreement Proposal there are no restrictions on you on what you can own, except that they must not be worth more than $77,021.00 at the time that you enter into the Proposal. After that you can also buy new assets without restriction. During the 3 year term of a bankruptcy, your ability to own major assets is restricted.

Your Credit Rating

Entering into a Debt Agreement Proposal seems to do as much damage to your credit rating with the commercial credit rating agencies as going bankrupt does. Your credit rating for both is badly damaged for 7 years by either circumstance.

Anecdotal feedback that I receive seems to indicate that entering into a Debt Agreement Proposal does you no favours, credit rating wise. Lenders seem to be quite uncomfortable to see a bankruptcy type entry on your file.

Even if you in fact can pay off all of your debt in full, including all continuing interest and charges, the fact that you once were in a Debt Agreement Proposal which is part of the Bankruptcy legislation still sits on your credit rating until the 7 years is up. It should have noted there however that you had paid the debt in full.

Like bankruptcy, by entering into a Debt Agreement Proposal you’ll find it hard, although in some cases not always impossible, to get a loan from the usual sources in that time and even after you’ve finished paying what you said that you would pay. Lenders seem to take the view that as you’ve done something to do with bankruptcy administration then that’s it. They seem completely incapable of working out how to allow for the root cause of the problem in the first place such as a period of unemployment or under-employment, illness, or a relationship breakdown.

A Comparison between the dollar cost to you between a bankruptcy and a Debt Agreement Proposal presuming that your net after tax income is $795 per week, and the bankruptcy threshold income figures (as at March 2008) remained the same for 3 years, and you have no dependants but you have $40,000 in unsecured credit card and unsecured personal loan debts.

Bankruptcy

With a bankruptcy the debt of $40,000 would be cancelled as far as you are concerned, and you wouldn’t have to pay anything else to the banks and credit card companies on these debts.

Your net income of $795 per week is $24 per week higher than the threshold amount of $771 a week applicable to you, which I show in Bankruptcy Information Sheet No 1 - Your Incomeon this website. During the 3 years of your bankruptcy you would need to pay 50% of the $24 excess to your bankruptcy trustee, which is say $12 per week. Your disposable weekly income, your spending money, would therefore become $783 a week instead of $795 a week.

Over the 3 year period of your bankruptcy, at $12 a week, you would pay in total $1,872 to your bankruptcy trustee. Interestingly, from this $1,872 ITSA would retain the whole lot as their fee. Your $40,000 unsecured creditors would get nothing.

Debt Agreement Proposal

If we presumed that you had the same debt and the same income figure, and that your offer in a Debt Agreement Proposal returned 75 cents in the dollar to your creditors over the same 3 year period, and 25 cents to the Debt Agreement Administrator, I calculate that your contribution to the Proposal would be $256.41 per week, or $1,111.11 monthly.

Under both a bankruptcy and Debt Agreement Proposal scenario, your credit rating will be badly damaged with the commercial credit rating agencies for 7 years, and your name will be recorded forever on the National Personal Insolvency Index.

The way that Debt Agreement Proposals are administered, you can have 2 goes at getting one through, so if your first offer is not accepted, you can try again. To be able to have more than 2 goes, there’d have to be special circumstances.

Final Comments

As you can see, each person’s choice of whether to declare themself bankrupt, or to try and enter into a Debt Agreement Proposal, is very much a personal choice with lots of factors influencing your final choice.

If, by the way, your debt or assets or income is outside the Part 9 parameters shown earlier, then you can still propose something similar, but this time you have to do it through a registered Trustee in Bankruptcy, and because these bigger matters are covered under Part X of the bankruptcy laws. What you’ll have to put together is called a Personal Insolvency Agreement (PIA) under Part 10 of the Bankruptcy Act.

If I can’t help you here, I can refer you on to a registered trustee if you need a Part 10. My referrals go to a Chartered Accountant in Sydney, Nick Crouch. Nick’s address is:

Crouch Amirbeaggi
Level 28, St Martins Tower, 31 Market Street, Sydney 2000.
Telephone 02 8262 9333
Fax 02 8262 9300

Email: This e-mail address is being protected from spam bots, you need JavaScript enabled to view it
Web site www.crouch.net.au

If you contact Nick or his partner Shabnam, mention my name as your referral please.  Crouch Amirbeaggi are also registered company liquidators.  I don’t get a commission for any referrals but I charge Crouch Amirbeaggi for having their details on my website.