Everyone was in debt, but that's permissible (7)
I believe the answer is:
allowed
'that's permissible' is the definition.
(I've seen this in another clue)
'everyone was in debt' is the wordplay.
'everyone' becomes 'all' (all people).
'was in debt' becomes 'owed' ('they owed' means 'they were in debt').
'all'+'owed'='ALLOWED'
'but' is the link.
(Other definitions for allowed that I've seen before include "Legitimate" , "Gave permission" , "Owned" , "Permitted and granted" , "Acknowledged" .)