What is a Part 9 Debt Agreement?
A Part 9 Debt Agreement is a binding agreement between you and your creditors under the Bankruptcy Act 1966.
It’s not a consolidation loan or an informal agreement with your creditors.
It is a legally binding contract that your creditors will accept the amount of money that you can afford to pay over a period of time, to settle your debts.
With a Part IX Debt Agreement, interest and fees on your debts are usually frozen, allowing you to repay a fixed amount during the period of the agreement.
The total amount is usually less than what you actually owe. Under the agreement, once this money has been paid, your creditors cannot recover the rest of the money that you owe.
Concern around rising debt in Australia
The Australian Financial Security Authority (AFSA) figures show that while the numbers of bankruptcies in Australia has decreased, the number of Part XI Debt Agreements each quarter is increasing. Debt agreements are increasingly being seen as a sensible alternative to bankruptcy. You must remember that proposing a Part IX debt agreement is still an act of bankruptcy.
While it does provide a more flexible alternative to bankruptcy, you should only consider a debt agreement once you’ve exhausted all your options. If you feel overwhelmed by debt, you should speak to a financial advisor. Signing a Part IX Debt Agreement can affect your ability to obtain credit in the future, so it’s a decision that you should consider very carefully.
When would I consider a Part 9 Debt Agreement?
If you are insolvent - this means that you really cannot find any way to pay your debts - and you want to protect an asset such as your home, you can submit a Part IX Debt Agreement proposal. This proposal will detail how much you can afford to pay towards your outstanding debts, how and when the payments will be made, and asks that your creditors accept this part payment to satisfy your entire debt.
The agreement is formalised when creditors agree in writing or by voting at a meeting to accept the terms of the agreement.
You may consider a Part IX Debt Agreement if:
- you haven’t been bankrupt or had a Debt Agreement for 10 years
- Your divisible property is valued at less than $108,162.60
- Your unsecured debts are less than $108,162.60
- Your income after tax is less than $81,121.95
Things to weigh up
You should consider making an informal agreement with your creditors or undertaking a voluntary bankruptcy before you enter into a Part 9 Debt Agreement.
A debt agreement might not necessarily have your best interests in mind, so getting sound advice from a financial counsellor can help you to be certain that you aren’t going to be worse off as a result of the agreement. Make sure that your debt administrator is registered by checking AFSA's list for registered debt administrators.
There are costs involved in setting up a formal Part XI Debt Agreement:
- Publishing a notice to advertise a creditors meeting on AFSA’s website $260
- Debt agreement proposal lodgement costs: $200
- Administration fees: 20% of the value of the proposal accepted by the creditors
- A Debt Administrator may charge you a fee
A debt agreement won’t release you from any secured debts - you may still lose the assets tied to a secured debt, such as a car used as security for a car loan.
When you prepare a Part 9 Debt Agreement proposal, you want to be realistic about what your creditors will accept, what you can honestly afford, and what will happen if your circumstances change.
How does the process work?
- You will prepare a debt agreement proposal and submit this to the Official Receiver by email, within 14 days of signing the documents.
- The Official Receiver will assess your application for eligibility and completeness, before arranging a meeting of your creditors.
- To be approved the proposal must be accepted by a majority in value (those who are owed >50%of your total debts) of your creditors.
- All unsecured creditors will be paid the agreed percentage of the debt they are owed. You will usually pay this amount in set periodic payments over a certain period of time. This could mean that:
- you may lump sum payments from your income over a period of time
- you make a one-off lump sum payment to fully and finally settle all of your debts.
- you sell assets and pay the proceeds to your creditors
- you may have a temporary stop on payments due for a specified time period.
Once accepted, the Debt Agreement can be varied by you or by your creditors with a written application. Any variations need to be approved by a majority in value creditors vote.
If your circumstances change you can also apply to vary or terminate the agreement.
The debt agreement will end when you have completed all obligations and payments. The Official Receiver will be notified by your administrator, and the National Personal Insolvency Index will be updated accordingly.
You can still operate a business, on the condition that you disclose the debt agreement to all people dealing with the business. You can be director of a company. There may be some restrictions on membership of professional or trade associations during the period of the debt agreement.
How will a Part XI Debt Agreement affect my home loan application?
Once you have been released from the Part IX Debt Agreement for 12 months, you can apply for a home loan.
The debt agreement and the overdue payments or defaults that resulted in you deciding to undertake the Part IX Debt Agreement will show on your credit history for 5 years from the date of the agreement.
When you apply for a home loan, you’ll need to show that you can meet the repayments on the mortgage moving forwards.
Some of the things you will need to show before you apply for a home loan pre-approval are:
- No overdrafts on your bank statement for at least 6 months.
- Be in regular, paid employment.
- Have a strong savings history.
- A stable residential history.
- Ideally, you’ll have a 20% deposit, but you get a home loan pre-approval with a deposit of 5% plus the one-off purchasing costs.
- If you’re struggling to save the deposit, and you have someone who can help you out, the deposit money can be gifted to you. You’ll need to hold it in a bank account for 3 months, and have a statutory declaration from the benefactor stating that the money is not to be repaid.
- Show that there was a good reason for the debt agreement and the circumstances that lead you to make the decision to undertake the debt agreement.
Your pre-approval application will be submitted to a specialist mortgage lender, not a major bank. A home loan taken out after a Part 9 Debt Agreement will have higher interest rates that a standard home loan.
The good news is, once you’ve made regular repayments on time for a couple of years, you will be able to refinance to access a lower rate on your home loan.
If you are considering getting a home loan but thought it would be impossible due to your credit history, give our mortgage brokers a call on 1300 366 287 to find out how we can help you to get a mortgage preapproval.