Part IX (9)Debt Agreements – the basics

1. Part IX (9)Debt Agreements – the basics

2. What is a Part IX Debt Agreement ? • Legally binding agreement between a debtor and a creditor • Debtor maintains normal contractual payments to secured creditors, while unsecured creditors including fees and costs are consolidated into one affordable payment. • Doesn’t have the serious consequences of a bankruptcy ?

3. Financial Counsellor Perspective Why consider a Debt Agreement over a bankruptcy? • owns a property or has an asset realisable in bankruptcy • high income & may need to pay income contributions • employment / license could be affected by full bankruptcy ie, security guard or real estate agent • is likely to receive a monetary gain within a bankruptcy period ie, inheritance • Listed on Public Record (NPII) for 5 years. Bankruptcy is forever. • Hardship periods are coming to an end • Lump sum available to avoid 3 year bankruptcy term • Company Directorship • Sole Trader is required to have full name in the title of their business

4. Eligibility • Must be less than the following amounts: • $1,578.94 - Weekly Income (net) • $109,473.00 – Assets • $109,473.00 - Unsecured debts • Not been a discharged bankrupt or in a Debt Agreement within the past 10 years • Must be insolvent (unable to pay debts) • Can afford to make payments towards a Debt Agreement

5. Consequences of a Debt Agreement • The debtor is not bankrupt and therefore avoid restrictions of a full bankruptcy • Proposing a Debt Agreement is an act of bankruptcy • Need more than 50% of creditors to vote ($value) • Once accepted: * Protects assets & enforcement action from creditors * Stops interest • The debtor is released from provable debts upon it’s completion • Listed on Public Record (NPII) 5 Years • Listed on a Credit History for 5 years • A debtor cannot borrow more than $5,507 without disclosing he/she in a current Debt Agreement • Debtor can still be a Company Director

6. Aim of Debt Agreements • Be affordable • Be attractive to debtors as an alternative to bankruptcy • Be attractive to creditors as an alternative to bankruptcy • Protect assets and employment • Stop interest

7. Australia Tax Office debts • ATO expect all tax returns (& BAS Statements (if applicable) to be up to date before considering a positive vote towards a Debt Agreement. • The RDAA (Registered Debt Agreement Administrator) would expect Tax Returns to be up to date to disclose a true reflection of a debtor’s financial situation, ie. Threshold assessment and certification duties • ATO will keep refunds

8. Role of Administrator – (pre lodgement) Confirm, assess & substantiate a debtors: • Insolvency status • Debts are fully disclosed and correct • Income is accurate • Affordability • Explanation of circumstances to creditors • To provide the best outcome for both debtor & creditors Provide the debtor with the following: • A Copy of Prescribed Information document • The consequences of a Debt Agreement • Other available options for dealing with their debts

9. Case study .... • Kayne and Kim West – Debt Agreement or not?

10. The Facts: • Kim and Kayne were managing minimum payments until Kim became permanently incapacitated 18 months ago, therefore unable to work and used existing credit cards to help pay the bills. • Kayne: • Owns a 2012 Jeep Cherokee which is financed through GE Finance with a balance of $25,250 with 4 years until payments are finished. The Jeep is valued at approximately $23,250.00 • He is a truck driver and the sole director of Big Bad Trucks Pty Ltd. His main contractor requires he trades as a company. This company pays for his telephone and internet. • His average net weekly income is approximately $1552.30pw and based on recent tax returns.  • $43,552.94 in unsecured debts and up to date with his tax obligations. • Suffers from depression and anxiety and is on medication to control this.

11. Kim: • A Financial Counsellor helped her claim her superannuation via a MB Lawyers and will be receiving $26,000 within the next few weeks. There is another claim for insurance but this could take many years to negotiate if at all. • Has a loan with Esanda Finance with a balance of $5,126.32. A 2010 Toyota Prado is secured to this loan and due to finish in a year’s time. The Prado is valued at $25,000 • Unsecured debts of $ 57,042.06  • Receives Family Allowance from Centrelink of $300 fortnight • Joint details: • Mortgage on family home with Westpac with a balance of $223,456.89.

12. Mortgage is up to date after a Financial Counsellor organised an early release of Kayne’s superannuation. • House is valued at approximately $340,000 • Approximately $15,000 in furniture and household items (re-sale value) • A Statement of Financial Position shows uncommitted income of around $146.30pw, after taking into consideration house hold expenses.  • The unsecured debt owed to Westpac for $19,564.22 is in joint names

13. Things to consider: • Kayne: • Consequences of full bankruptcy in relation to the following: • Income? • Employment? • Assets? • Civic Compliance Fines? • Is Kayne eligible to do a Part IX Debt Agreement? If so, how would this benefit him? • Can you suggest any other solutions for Kayne? • Kim: • Consequences of full bankruptcy in relation to the following: • Income? • Assets? • Is Kim eligible for a Part Ix Debt Agreement? If so, how would she benefit from it? • Can you suggest any other solutions for Kim?

29. Varying a Debt Agreement by a debtor • Should be considered for debtors with significant changes in circumstances • New budget & financial statement is drawn up (Administrator’s duties still apply) • Any changes from the original proposal are disclosed to creditors (proof required) • Variation proposal lodged with AFSA. Again more than 50% of creditors vote on it’s acceptance • If not accepted original proposal remains in place

30. 3 years later………… • Variation or Termination?

31. Facts • 3 years later………………………………………………………… • Joint Circumstances: • Both Kim and Kayne’s Debt Agreements were accepted by more than 50% of their creditors. • Unfortunately, one of Kim and Kayne’s children has been diagnosed with a serious illness • They’ve changed their mortgage to interest only. Equity in the property hasn’t changed since the original Debt Agreements were accepted. • Kim: • Her original Debt Agreement was paid out and a Completion Certificate sent to AFSA. • Kim’s creditors were notified by AFSA and her NPII and Credit History should be updated to reflect this. • The balance of Kim’s Super Income Protection Insurance Claim received another $10,000 which was spent on a family holiday. • Her health has further deteriorated and no longer able to drive. Kayne now drives her car and is unsecured to any loans.

32. Kayne: • Kayne has maintained his Debt Agreement payments as promised and has a balance of $12,480 with 2 years of payments to go. • Kayne is forced to reduce his hours to help with the care of his daughter and wife. His income is now approximately $1,252.30per week. • Kayne sold his Jeep Cherokee and paid out GE Finance in full • A new Statement of Financial Position shows there is not enough money to maintain the Debt Agreement Proposal payments

33. Suggestions and to what should Kayne do? Ask Creditors for a Variation? Why? Ask Creditors for a Termination? Why? Can he do both?

37. Terminating a Debt Agreement • Creditors may apply for termination • Debtors may apply for termination • Terminations are lodged with AFSA Creditors vote on the acceptance of a termination • If a debtor hasn’t made a payment for 6 months, it is automatically terminated • Debtors cannot go bankrupt without the Debt Agreement being terminated (unless terminated by a court)

38. ‘As the nation’s credit card bill hit’s a staggering $51.3 billion’, consumers are using plastic to just complete their weekly supermarket shops”