Navigating personal insolvency is always a challenging situation. When you are unable to pay your debts, it’s important to explore your options as soon as possible.
Acting quickly may allow you to take advantage of some of the more flexible options available under the Bankruptcy Act 1996.
Three main debt solutions fall under the umbrella of bankruptcy. These provide multiple avenues for resolving personal debts, and they may be a suitable alternative to bankruptcy in some situations.
In this article, we will explore bankruptcies and their Acts in Australia, and discuss when and why each option applies.
Bankruptcies Acts
Australia’s Bankruptcy Act provides several options for managing personal insolvency. While these three options are covered under the Act, Debt Agreements and Personal Insolvency Agreements are not the same as going bankrupt, however they are considered acts of bankruptcy.
Let’s review each option in more detail to see how they apply:
1. Part 9 Debt Agreement
A Part 9 (IX) Debt Agreement is a formal insolvency arrangement that allows you to negotiate with creditors to pay a percentage of your total debt over a set period of time.
If you successfully complete your Debt Agreement, the remaining amount of the debt is forgiven, and creditors are unable to recover the rest of the money you owe.
The major advantage of a Debt Agreement is that you receive professional support in negotiating with your creditors. The Administrator of your Debt Agreement will contact your creditors and assist you in reaching a feasible solution.
Who is Eligible for a Debt Agreement?
You may be eligible for a Debt Agreement if:
- You are insolvent
- You have not been bankrupt, or had a Debt Agreement or Personal Insolvency Agreement in the last 10 years
- Your debts, assets and income are less than the set amounts
While a Debt Agreement can substantially reduce your total debt, you will be required to make payments against the remaining amount. As such, you must be financially capable of making those payments at the time the Debt Agreement is proposed.
How Long Does a Debt Agreement Last?
Debt Agreements can last for up to 3 years. If you own your own home, you can propose a Debt Agreement that lasts for up to 5 years.
The exact timeframe for your Debt Agreement depends on the level of debt and your ability to make repayments. Debt Agreements may also be extended (or terminated early) if your circumstances change, e.g. if your income changes and you are unable to maintain the original agreement.
When to Consider a Debt Agreement
You should consider a Debt Agreement if you have relatively small amounts of unsecured debt, and if your debt, income and assets fall below the set amounts. Debt Agreements are a flexible insolvency arrangement that can provide relief from creditors and substantially reduce the total amount of your debt.
2. Part 10 Personal Insolvency Agreement
A Part 10 (X) Personal Insolvency Agreement (PIA) is an arrangement between you and your creditors to resolve outstanding debts. It’s an alternative to bankruptcy that provides breathing room to negotiate with your creditors, and it may allow you to reduce your total amount of debt.
During a PIA, you are required to make regular payments to the Trustee managing the agreement. The Trustee distributes these payments to your creditors according to the terms of the agreement.
Who is Eligible for a Personal Insolvency Agreement?
You may be eligible for a PIA if:
- You are insolvent
- You have a connection to Australia by residence or business
- You are not subject to an undischarged bankruptcy
- You have not applied for a PIA in the last 6 months
There are no debt, income or asset limits for Personal Insolvency Agreements, so it’s a suitable arrangement for individuals with relatively high levels of income and/or debt.
How Long Does a Personal Insolvency Agreement Last?
There is no maximum time limit on Personal Insolvency Agreements. Your PIA can last for any agreed amount of time. Your Administrator will assist you in developing an agreement that has a feasible time frame.
When to Consider a Personal Insolvency Agreement
You should consider a Personal Insolvency Agreement if you are ineligible for a Part 9 Debt Agreement. Entering into a PIA is suitable for people with debt, assets or income that exceeds the maximum thresholds for Debt Agreements.
3. Bankruptcy
Bankruptcy is a formal process that provides relief from most types of debts.
During bankruptcy, a Registered Trustee will gather and sell your assets. The proceeds from these sales will be paid to creditors, after which you will be discharged and most remaining debts will be forgiven.
Bankruptcy is a final solution that carries long-term consequences, so it should be treated as a last resort.
Who is Eligible for Bankruptcy?
Bankruptcy is open to any individuals that are insolvent. There are no minimum or maximum thresholds for your debt, income and assets.
You can apply for bankruptcy if you are currently in a Debt Agreement or Personal Insolvency Agreement. Speak with your Administrator – your agreement will need to be terminated before you can apply for Bankruptcy.
How Long Does Bankruptcy Last?
Bankruptcy typically lasts 3 years and 1 day from when your application is accepted by AFSA. The Trustee may extend the bankruptcy period for up to 8 years in particular circumstances.
When to Consider Bankruptcy
Bankruptcy is the last resort in the case of personal insolvency. You should only consider bankruptcy if you have received professional advice and are ineligible for a Personal Insolvency Agreement.
Declaring bankruptcy frees you from most debts, but it comes with lasting consequences, and it can affect your ability to obtain credit in the future. You are also unable to act as the director of a company while bankrupt, so it may affect your employment.
Comparing the Bankruptcy & Acts
The insolvency tools listed above serve similar purposes, but they come with different restrictions:
| Maximum Debt Threshold | Maximum Asset Threshold | Maximum Income Threshold (After Tax) | NPII Listing | Can I be the director of a company? | Application Fees | Maximum Timeframe | |
| Debt Agreement | $140,012.60 | $280,025.20 | $105,009.45 | Yes – typically for 5 years, or the date your obligations are complete, whichever is later. | Yes | Yes | Up to 5 years |
| Personal Insolvency Agreement | N/A | N/A | N/A | Yes – your details will appear permanently on the NPII. | No | Yes | N/A |
| Bankruptcy | N/A | N/A | N/A | Yes – your details will appear permanently on the NPII. | No | No | Up to 8 years |
