Debt Agreements for Consumers under Bankruptcy Law in Australia and Developing International Principles and Standards for Personal Insolvency

• Author: Mary Wyburn
• Published date: 01 June 2014
• DOI: http://doi.org/10.1002/iir.1222
• Date: 01 June 2014

Debt Agreements for Consumers under

Bankruptcy Law in Australia and Developing

International Principles and Standards for

Personal Insolvency

Mary Wyburn*

Business Law, University of Sydney Business School, University of Sydney, Sydney NSW, Australia

Abstract

The debt agreement option under bankruptcy law was introduced in Australia in

1996. Since its introduction, it has undergone significant review, and two sets of

amendments have been crafted to meet issues as they have been raised. Its popu-

larity is reflected in the increasing proportion of debt agreements compared with

the other two debt relief options available under bankruptcy legislation, bank-

ruptcy and the personal insolvency agreement. A review of the debt agreement

scheme has recently been undertaken, but the government has yet to respond to

its recommendations. Meanwhile, the work of comparative bankruptcy scholars

has found new impetus from the treatment of consumer debtors during the Global

Financial Crisis. At the same time, at the international level, there is growing inter-

est in developing general principles for the treatment of personal insolvency, de-

spite the acknowledged diversity of approach to personal insolvency at the

national level. This paper examines the debt agreement framework and how it fits

within the comparative bankruptcy literature and the developing international

principles for the treatment of personal insolvency. Copyright © 2014 INSOL

International and John Wiley & Sons, Ltd

I. Introduction

The debt agreement framework was introduced into Australian bankruptcy law in

1996 in order to provide insolvent consumers with an alternative to formal bank-

ruptcy. The only other option available at the time, the Part X arrangement (now

the personal insolvency agreement), a formal agreement with creditors, was not a

*E-mail: mary.wyburn@sydney.edu.au

Copyright © 2014 INSOL International and John Wiley & Sons, Ltd Int. Insolv. Rev., Vol. 23: 101–121 (2014)

Published online 13 June 2014 in Wiley Online Library

(wileyonlinelibrary.com). DOI: 10.1002/iir.1222

practicalalternative for consumer debtorsbecause of the costs involved in its establish-

ment and administration. Since its introduction, the debt agreement regime has un-

dergone continued scrutiny and review. So far, two sets of legislative amendments

have soughtto address the main problems as theyhave been revealed. Arecent review

has been undertaken with the response of the government yet to be determined. The

significant increase in the number of debt agreements over this time demonstrates its

popularity, but there are still issues being faced, in particular, the growth of a commer-

cial model for debt agreement administrators that developed in place of the wide

range of different types of administrator originally envisaged. Over this same period,

consideration of these issues has been emerging at the international level.

This paper explores how the Australian debt agreement provisions measure up

against the principles and general standards for personal insolvency law now being

discussed internationally. The first section of the paper briefly examines the back-

ground to their introduction and the general mechanics of their operation within

Australian bankruptcy law. The paper then looks briefly at the various surveys

and reviews and resulting amendments that have refashioned parts of the debt

agreement framework to address issues as they have arisen. It then discusses the

themes emerging from the comparative consumer insolvency and

overindebtedness literature and the newly developing international principles for

personal insolvency law and examines the operation of Australian debt agreements

against this developing international framework.

II. Background and Operation

Personal insolvency law provides the means by which an individual insolvent is

able to obtain relief from the pressure of debts they are unable to meet.

1

For a

long time, it offered only two options. The first, bankruptcy, enables an individual

insolvent to petition for their own voluntary bankruptcy or a creditor to

petition the court for the compulsory bankruptcy of the debtor. The end result is

that the individual’s estate becomes vested in a trustee (either the Official Trustee

operating through the government regulator or a registered insolvency practi-

tioner) and is administered for the benefit of the creditors. During bankruptcy,

the bankrupt is subject to some restrictions, for example, in relation to obtaining

further credit and overseas travel but after a period of 3 years, the bankrupt is

discharged from those debts that are administered in the bankruptcy.

2

In this

way, the individual is given a ‘fresh start.’There is no debt, asset or income limit

or threshold required for entry into bankruptcy, except in relation to a creditor’s

petition. Such a petition requires the creditor to establish a debt owed to them

of at least $5,000.

3

1. Another optionis for the individual insolventto come

to an agreement with their creditors outsidethe formal

bankruptcysystem. However, thereremains the risk that

a dissenting creditor will initiate bankruptcy.

2. Debts not provable in the bankruptcy and therefore

not discharged at the end of the bankruptcy term

include ‘[p]enalties or fines imposed by a court in re-

spect of an offence’and debts due under a family law

maintenance agreement or maintenance order: Bank-

ruptcy Act 1966 (Cth) ss 82(1A),(3).

3. Bankruptcy Act 1966 (Cth) s 44.

INSOL International Insolvency Review102

Copyright © 2014 INSOL International and John Wiley & Sons, Ltd Int. Insolv. Rev., Vol. 23: 101–121 (2014)

DOI: 10.1002/iir