Alternatives to bankruptcy

Contributed by Ian Macdonald and current to 1 September 2005

DEBT AGREEMENTS

A debt agreement is an agreement with creditors outside bankruptcy which is open to debtors with a modest income, assets and levels of unsecured debt.

To be eligible to enter a debt agreement, a debtor must meet the following criteria:

• be insolvent – that is, not able to pay debts as they fall due;

• not be bankrupt nor be in an insolvency arrangement in the preceding ten years;

• have unsecured debts totalling no more than the threshold amount, which is currently $71,526;

• have unprotected property available for distribution amongst creditors of no more than the threshold amount; or

• have likely income in the forthcoming year of no more than three-quarters of the threshold amount (currently $53,644.50).

A debtor who meets these criteria can put together a proposal, and send it to ITSA. If the Official Trustee is of the view that the proposal is in the creditors’ interests, it accepts the proposal for processing. This acceptance has the effect of freezing enforcement action by creditors. The proposal is then considered, either in a meeting or by correspondence. The creditors either accept the proposal within 25 working days, or it lapses. This decision requires a special majority, which is a majority in number and three quarters in value of the creditors.

Debt agreements can be in a wide variety of forms. Generally, they will offer creditors something not available to them if the debtor becomes bankrupt. Examples are payments from funds otherwise protected in bankruptcy, such as workers’ compensation or personal injury awards, or payments from income below the protected level. This may be possible for a bankrupt supported by another person, or assisted by friends or family members.

For a debtor, the major advantage is that he or she does not become bankrupt. For a person upon whose career bankruptcy could have an adverse effect, a debt agreement may be attractive.

For debtors attracted by debt agreements, but who have income, assets or debts over the threshold levels, a Part X arrangement may be possible.

PART X ARRANGEMENTS

Like a debt agreement, a Part X arrangement is outside bankruptcy. Unlike a debt agreement, there are no monetary limits on a Part X. The principal drawback with a Part X arrangement is that it is set up and operated by a registered trustee, who is paid for his or her work. The cost may run to many thousands of dollars. A Part X arrangement is not suitable for a person without access to money or property, but rather it is for debtors who do have both, but insufficient to pay their debts in full.

NEGOTIATION

The other principal alternative to bankruptcy is negotiation and compromise with the creditors. This has the advantage of being cheap, and not altering the debtor’s legal position in the way bankruptcy does. The main drawback with this process is that only one greedy and unreasonable creditor can wreck the arrangement. Under West Australian law there is no mechanism to restrain any particular creditor who wishes to pursue their legal rights of recovery to the bitter end, irrespective of the effect on the debtor and other creditors.