Commercial Debt Forgiveness

Commercial Debt Forgiveness

Debt forgiveness is a huge debate around the world. People all around the world are involved in some kind of debt payment such as private loans, credit card, mortgage, etc. To make the concept clear for you, we are going to discuss the key aspects of Commercial Debt Forgiveness. The process becomes complex when you start taking steps in real.

Any amount of debt is no more obligatory to be paid if you are freed from it. The process is called debt forgiveness. In Australia, the rules regarding debt forgiveness were defined under category of Commercial Debt Forgiveness in 1996. How does a debt become commercial? If some amount or the whole interest payable amount on debt would be allowable deduction then the debt becomes commercial. The rules stated in the law allow commercial debt to be forgiven in the order mentioned below:

  • Previous financial years revenue losses
  • Previous financial years net capital losses
  • Expenses deductible
  • Cost base of assets
  • Reduce cost base assets

The rules apply in all cases. You can consult your financial planner for the purpose of debt forgiveness. We are sure that the same rules will be mentioned by your planner. In only 3 cases these rules are not mandatory for debt to be forgiven. We have mentioned the 3 cases below:

  1. Will of deceased person
  2. Bankruptcy law action
  3. Natural case of love and affection

Deep Analysis of Debt Forgiveness

All the information mentioned in this article is based on Division 7A of law which was applied on December 4, 1997. There are different scenarios which could be the reason for commercial debt forgiveness to take place. We have discussed the possible scenarios below:

  • The creditor agrees to let you get rid of any obligation to pay the partial or full amount of debt. The obligations are waived, released or extinguished from the creditor’s side. The case is other than you paying partial or full payment of debt in form of cash or property, only then the case would qualify for debt forgiveness.
  • The creditor (private company) loses the right or case to sue debtor for partial or full amount of the debt due to limitation period finishing. In Australia, the government has decided limitation period to be for six years. However, if you live in the northern areas then the limitation period is only three years. When does the limitation period begin? The limitation starts from the date when case is filed for suing the debtor in order to recover commences. The limitation period can only be extended if debtor makes partial payment of debt or acknowledges extension.
  • Debtor gets into an agreement with the creditor (private company) where you are obligated to pay no amount and the debt will be forgiven at future date, excluding token amount. The creditor’s accounting records will still show the remaining debt amount. On the other hand, no debtor is allowed to make this agreement if the creditor does not agree.

Example Case – We have briefly discussed an example for you to understand the concept of Commercial Debt Forgiveness in a better way. After analysing the case, you will be able to have clear idea of the concept.

Adam Pvt Ltd is owed $100,000 by one of the shareholder named Alan. Both the parties get into an agreement in 2005-06 financial year. The agreement defines that Alan’s obligation towards paying the debt amount will finish when the financial year 2007-08 ends if Alan is able to make a payment of $1,000 on 30 June, 2008 to Adam Pvt Ltd. In this way, the corporation will go ahead and record debt amount of $100,000 in the books under the name “asset worth”.

When the arrangement is entered into the debt account, the debt of Alan for amount $100,000 is forgiven. Adam Pvt Ltd is taken to pay Alan a dividend amount of $100,000 on 30 June, 2006 which is due to the corporation’s distributable surplus. On the other hand, actual forgiveness of debt takes place on 30 June, 2008 but the amount has already been disregarded previously by treating it as a dividend.

Debt Parking Arrangement

It is a popular type of method used commonly in cases of commercial debt forgiveness. There are certain rules and criteria which have to be fulfilled in order to make this arrangement. Debt parking arrangement has been explained below.

Private company (creditor) transfers the right of receiving debt payment from debtor to a new creditor in majority of the debt parking cases. The new creditor can be someone you don’t know or your associate who agrees to be a part of arrangement. Either way, the purpose of transferring payment receiving right is that you won’t have to make any payments. For this reason, you must be sure that the new creditor won’t ask you to pay the debt.

Simplifying the whole process of commercial debt forgiveness; creditor is no more obligated to pay debt if it is waived, extinguished or released by creditor other than paying debt amount fully. On the other hand, debt could be forgiven if creditor transfers receiving right to another party. Lastly, debt is forgiven if the right to receive debt payment is ceased.