Author
Domenic CalabrettaChief Executive Officer & ASIC Registered Liquidator
Understanding your personal insolvency options
In 2020–21, Australia recorded 10,621 new personal insolvencies, a drop from the previous year. While government support programs like JobKeeper helped ease financial pressures, many Australians are still facing financial distress and exploring alternatives to bankruptcy.
When struggling with personal insolvency, a debtor (the person who owes money to creditors) needs to consider whether a personal debt agreement or becoming bankrupt is the better option for them. Each has both similar and different criteria, and it's worth knowing the difference so that you make the best decision for yourself.
What do bankruptcy and debt agreements have in common?
The key similarity between a debt agreement vs. bankruptcy is that both apply when you are insolvent—meaning you cannot meet your debt when payments are due.
Debt Agreement vs. Bankruptcy: What’s the Difference?
1. Residency Requirements
- Debt agreement: You can apply regardless of whether you have a residential or business connection with Australia,
- Bankruptcy: You must either be present in Australia or have a residential or business connection here.
2. Debt Repayments
- Debt agreement: You negotiate with creditors to repay a portion of your debts over up to five years. Once agreed, a debt agreement administrator manages the repayments.
- Bankruptcy: You may not have to repay your debts unless your income exceeds a set threshold ($59,990 per year). A bankruptcy trustee manages your financial affairs for three years and one day.
3. Income Limits & Future Earnings
- Debt agreement: Your after-tax income must be below $89,339 at the time of the agreement proposal. However, there’s no cap on future earnings—you only need to afford your agreed repayments. Repayment terms can vary between three and five years, depending on your circumstances and what is accepted by your creditors.
- Bankruptcy: While there’s no initial income limit, you may have to contribute to your bankruptcy estate if your income exceeds $59,990 per year.
4. Asset Protection
- Debt agreement: Your assets remain protected unless you agree to sell something to meet repayment terms. For example, if you said that you would sell your car to meet a payment to the debt agreement, you will be obligated to undertake the sale of the car. Your personal net asset position must be below $238,238.
Bankruptcy:
A trustee has an obligation to realise (or sell) your assets, such as your house and property, for the benefit of your creditors. They can also recover any money in your bank account to meet your debt obligations (but will leave you with enough for modest living expenses).
5. Interest Charges & Debt Limits
- Debt agreement: Interest on unsecured debts is frozen for the term of the agreement, offering relief from accumulating interest. All creditors are bound to the agreement and cannot pursue you for the balance of debt (if any) once the agreement ends. However, your unsecured debts must not exceed $119,119.
- Bankruptcy: No limits to debt size apply, but interest isn’t frozen.
6. Business & Travel Restrictions
- Debt agreement: You can remain a company director and are free to travel abroad.
- Bankruptcy: You cannot serve as the director of a company nor travel overseas without written consent from your Trustee.
7. Credit & Financial Record Impact
- Debt agreement: You can apply for credit, but the agreement stays on your credit report for five years and may impact approvals. A debt agreement is recorded on the National Personal Insolvency Index for a limited time.
- Bankruptcy: You cannot borrow over $5,969 and there will be a record of your bankruptcy for five years from the date you are declared bankrupt or two years from when your bankruptcy ends. You are listed on the National Personal Insolvency Index for life.
Once declared bankrupt, you will be unable to apply for credit over $5,969, and there will be a record of your bankruptcy for five years from the date you are declared bankrupt or two years from when your bankruptcy ends. With a personal debt agreement, you are free to apply for credit. However, as the record stays on file for five years, there is a possibility it will be declined.
8. Previous Insolvency History
- It is important to note that if you have been bankrupt or entered into a debt agreement in the past 10 years, bankruptcy may be your only option.
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