How does a formal arrangement bind all creditors?
Formal arrangements with creditors are an attractive option if you need your proposal to be legally binding on all creditors. One of the major disadvantages of an informal arrangement is that they are not legally binding which means creditors are not obliged to accept your proposal and can demand full repayment of their debt.
To help explain how a formal arrangement works, let’s look at an example where you have five (5) creditors with a total amount owing of $100,000 split as follows:
#the above example is based on voting criteria for a Debt Agreement (different voting criteria applies to a Personal Insolvency Agreement
The arrangement will become legally binding on all creditors if you get more than 50% (in value) of creditors to agree to your proposal.
So in this example if you get creditors, A, B & C to agree to your proposal it would become binding on all creditors because they hold 55% of the total debt (ie the majority). It wouldn’t matter if creditors D & E were against it because they only hold 45% of the total debt (ie they are the minority).
For this reason formal arrangements can be a powerful tool to reach agreement across all creditors as unanimous approval isn’t required. The formal arrangement will bind all creditors which means:
- Once accepted by the majority of creditors no creditor can “break rank” and commence legal action to recover their debt at a later stage;
- Your property will be protected , meaning whilst the formal arrangement is in place no creditor can force bankruptcy upon you( which is how you could lose your property ).
Are their different types of formal debt arrangements?
There are two types of formal creditor arrangements, those being:
The differences between these two (2) arrangements are explained here.
If you need assistance or advice with a formal creditor arrangement call us today on 1800 676 598.