24 Sep Let’s Do a Deal! Reaching Settlements with Creditors – What are my Options?
Sometimes an individual (Debtor) finds themselves “in over their heads” with debt – we consider this to be unmanageable debt. In an effort to avoid bankruptcy (or have the restrictions of bankruptcy removed), a Debtor can seek to settle / compromise their debt by paying some of the debt they owe. There are a number of ways this can occur:
- An informal settlement
- A formal settlement (pursuant to the Bankruptcy Act 1966 (Cth) (the Act) – the references to sections and Parts below being to provisions of the Act)
a) Pre-Bankruptcy – Part IX Debt Agreement / Part X Personal Insolvency Agreement; or
b) Post-Bankruptcy – Composition or Scheme of Arrangement (pursuant to Section 73).
Debtors that cannot pay all of their debts can contact creditors directly (or with the assistance of a third party) to negotiate the settlement of their debts, which usually results in part payment of the debt owed.
There is no requirement for creditors to accept a settlement and there is no specific amount / percentage that creditors will accept to settle debts. Each case is different and depends on the individual circumstances, including previous dealings with creditors, the Debtor’s financial position and the attitude and position of creditors.
Informal settlements usually require agreement or settlement with all creditors to be effective. If this does not occur, creditors who have an unsettled debt can continue to pursue recovery of their debt (see this article here – which explains the process of recovering a debt owed). If this occurs, there may be uncertainty about the Debtor’s financial position moving forward.
Informal settlements are easier to negotiate when there is a small number of creditors, as there is often a limited pool of funds available to offer to creditors and separate agreements are more difficult to negotiate with a larger number of creditors.
Formal Settlements – Pre-Bankruptcy
The Act prescribes two methods for a Debtor with unmanageable debt to seek a formal settlement with their creditors prior to bankruptcy
A Debtor seeking to enter into a Debt Agreement is required to meet certain financial eligibility criteria, which includes their after-tax income, divisible property (assets) and unsecured debts being below indexed statutory limits. Those limits are currently:
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A Debtor cannot propose a Debt Agreement to their creditors if they have been bankrupt or subject to a Debt Agreement or PIA in the last 10 years.
The above financial limits do not apply to a Debtor putting forward a PIA proposal. A Debtor is however unable to put forward a PIA proposal if they have attempted to do so in the previous six (6) months (except with leave of the Court) or if you are an undischarged bankrupt.
Debt Agreements and PIAs are formal agreements with creditors that usually involve an offer to creditors (a lump sum of money or payments over time) to compromise a Debtor’s creditors on a commercial basis having regard to the anticipated outcome if they were to be declared bankrupt.
Debt Agreement Process
A Debt Agreement Administrator is appointed as an independent third party to administer a Debt Agreement. They are required to provide a report to creditors on the Debtor’s proposal, assess voting on the proposal and if the proposal is accepted, to administer the Debt Agreement (which usually primarily involves collecting and distributing funds to creditors).
A Debt Agreement proposal is either accepted or rejected by creditors. It is accepted if a majority in value (greater than 50%) of unsecured creditors that vote on the proposal vote to accept it.
If a Debtor’s proposal for a Debt Agreement is accepted, unsecured creditors’ claims (with the exception of HECS / HELP debts, penalties and fines imposed by a Court for an offence against a law and claims for unliquidated damages) are bound by the Debt Agreement and can no longer pursue recovery of their debt. If the proposal is not accepted, creditors are able to continue to pursue recovery of their debts.
Personal Insolvency Agreements (PIA)
A Controlling Trustee (such as a registered Trustee from SV Partners), being an independent third party, is appointed to:
- investigate the Debtor’s affairs;
- consider whether acceptance of the proposal would be in creditors’ best interests (compared to a bankruptcy of the Debtor);
- provide a report to creditors on their findings (including their recommendation on the proposal); and
- call and hold a meeting to allow creditors to vote on the proposal.
The investigations and enquiries conducted into a Debtor’s affairs pursuant to Part X of the Act are much more extensive and comprehensive than those conducted for a Debt Agreement proposal.
A PIA proposal is accepted if creditors pass a special resolution at the aforementioned meeting – a special resolution is a resolution passed by a majority in number and at least 75% in value of the creditors that vote at the meeting.
As for a Debt Agreement, a PIA is binding on most unsecured creditors and they can no longer pursue recovery of their debt owed. If a Debtor’s PIA proposal is not accepted, creditors can pursue recovery of their debts.
Formal Settlements – Post-Bankruptcy
If a Debtor has been declared bankrupt (and they are not yet discharged from bankruptcy), they may seek to reach a compromise of their debts owed at the time of their bankruptcy by way of putting forward a proposal pursuant to Section 73 of the Act.
In a similar manner to a Debt Agreement and PIA Proposal, a proposal pursuant to section 73 of the Act usually takes the form of some funds / property being made available to creditors (in a lump sum or by way of payments over time) that does not ordinarily form part of the assets of the bankrupt estate.
We discuss Section 73 proposals further in this article here.
So Which Option is Best?
If a Debtor has unmanageable debts, they have options available to them to reach a settlement with their creditors and seek to avoid bankruptcy. Reaching a settlement with creditors can allow a Debtor to move forward financially and often results in a better commercial outcome to their creditors.
Achieving a settlement requires careful consideration and assessment of a Debtor’s affairs and situation, which can be complex and often requires professional advice.
If a Debtor fails to deal with unmanageable debt early, they may have less options available to them. In addition, getting the wrong advice or advice too late in the piece can be costly both financially and psychologically. We recommend seeking professional advice from a trusted advisor as early as possible to avoid unnecessary heartache.
SV Partners are experienced specialists in assisting individuals (and companies) assess their options and deal with unmanageable debts. If you or your client are having trouble paying debts, contact SV Partners today for an obligation-free assessment of your options.