The Debt Agreement

The Debt Agreement """Under section 9 of the Australian Bankruptcy Act, a debt agreement is a legal agreement between a debtor and their creditors. The agreement permits repayment of less than the total amount owed to settle the debt in complete. They were enacted in 1997 by the Howard administration in order to provide an alternative to bankruptcy for individuals with the ability to repay a portion but not all of their debt. The agreements typically involve a modest payment spread over three to four years.

In 1997, there were only a few hundred approved in Australia, which increased to 8,500 in 2010. Instead of decreasing the number of bankruptcies, the number of bankruptcies has actually increased. In an effort to reduce the number of bankruptcies, the Australian government is examining additional methods to encourage individuals to enter into debt agreements.

A Registered Debt Agreement Administrator (RDAA) manages debt settlement agreements. Each administrator is required to be registered with the Insolvency Trustee Services Australia department of the Commonwealth Government. The RDAA receives funds from the debtor, which are then distributed to creditors. The client has no further contact with their creditors. ITSA audits RDAAs annually and conducts random audits of client administration. This contributes to the system's efficient operation.

In 2007, the debt agreement mechanism was revised to ensure that RDAA is compensated alongside other creditors rather than as a priority creditor. This essentially compelled RDAA to become debt collectors so that they could collect their compensation. Additionally, it ensured that each creditor received the same proportion of their initial debt. It mandated a minimum level of training for all administrators.

RDAAs are now responsible for the annual distribution of more than $100 million to creditors, making them an integral part of Australia's financial landscape. In bankruptcy, the average return to creditors is 3%, compared to 75% under a debt agreement. This has decreased the amount of problematic and questionable debts recorded by Australian lenders.

Those who engage into a debt settlement will have a notation added to their credit report. This prohibits them from borrowing in general for seven years. On the NPII, a permanent government record not used for credit evaluation, a notation is also made. Even though it is a """"act of insolvency,"""" it is not bankruptcy. After filing for a Debt Agreement, the debtors are free to retain any income increase or windfall gains.

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