How do Debt Agreements Compare with Bankruptcy?

By 21 December 2020 Debt Recovery
Debt Agreements Compare with Bankruptcy

There are a number of paths you can take when you’re facing bankruptcy and it’s important to consider each option carefully so that you can work your way out of this unfortunate situation where you can’t pay your debts.

The Bankruptcy Act 1966 (‘the Act’) sets out these options which we’ll look at below. One of the key things to consider is whether you are better off declaring bankruptcy, which may clear your slate of debts but has other serious consequences for your lifestyle, or you instead negotiate a legally enforceable debt agreement, which allows you to repay your debts on a schedule you can manage.

If you need more guidance on these options after reading this article contact Felicio Law Firm for a consultation. We will help clarify the best way forward with empathy and understanding.

The process and consequences of bankruptcy

When debts are mounting and a person has no way of meeting them, declaring bankruptcy under the Act often seems the best way forward.

Bankruptcy can be entered into voluntarily, or be forced on you by a creditor through a court order (what’s known as a sequestration order).

Once you are declared bankrupt, a trustee is appointed to manage your period of bankruptcy, which is usually three years and one day. The trustee can be appointed by the Australian Financial Security Authority (AFSA) or you can nominate your own registered trustee.

Once you are bankrupt and a trustee appointed, you have a series of ongoing obligations you agree to, including:

  • providing details of your debts, income and assets to your trustee;
  • facilitating the trustee notifying your creditors of your bankruptcy, which will stop them contacting you about repaying your debts;
  • facilitating the trustee selling certain of your assets to help pay debts;
  • making compulsory payments if your income exceeds a set amount.

Bankruptcy means you won’t have to pay unsecured debts, such as credit and store cards; unsecured personal loans and pay day loans; gas, electricity, phone and internet bills; overdrawn bank accounts; unpaid rent; and medical, legal & accounting fees.

But you will have to check with the creditor to see whether you are freed from certain other debts, such as Centrelink or ATO debts, victims of crime debts or toll fines.

Bankruptcy does not free you from certain other debts, such as court imposed penalties and fines; child support & maintenance; HECS and HELP debts; any debts you incur after your bankruptcy begins; and unliquidated debts.

It’s also important to note that being declared bankrupt can affect the way you live your life. During the period of bankruptcy your ability to work in certain trades and professions and be a director of a company will be restricted, while you’re also not able to travel overseas unless given permission by your bankruptcy trustee.

The record of your bankruptcy will also stay on your credit report for five years and your name will permanently remain on the National Personal Insolvency Index.

How are Part IX debt agreements different to bankruptcy?

A debt agreement is a legally binding contract between you and your creditors under which you make repayments of your debts on a payment schedule you can manage.

Such agreements are administered under the provisions of Part IX of the Act and hence are known as Part IX debt agreements.

There are conditions you must meet before being able to make such an agreement when you’re unable to pay debts that are due. Specifically you must:

  • not have been bankrupt, or had a debt agreement or personal insolvency agreement, within the last 10 years;
  • have unsecured debts and assets less than the set amount;
  • estimate your after-tax income for the next 12 months to be less than the set amount.

‘Set amount’ refers to indexed, threshold dollar amounts which are updated twice a year to reflect the Consumer Price Index or the base pension rate. As of September 2020, for instance, the unsecured debt amount was $118,063.

The process of creating a Part IX debt agreement involves:

  • negotiating to pay a percentage of your combined debt that you’re able to afford over a set period of time, and;
  • making repayments to a debt agreement administrator, instead of making individual payments to creditors.

Once you complete the payments under the debt agreement, creditors can’t recover the rest of the money you owe.

Is a Part IX debt agreement preferable to bankruptcy?

Like bankruptcy, there are a number of consequences as a result of entering a debt agreement and it will be up to your judgement – or that of your legal practitioner – as to which best suits your circumstances.

Firstly you should understand that by proposing a debt agreement  you are undertaking an ‘act of bankruptcy’, which  your creditors can potentially use to apply for a court order to declare you bankrupt.

Additionally, if you trade under a business name that isn’t your own, you must inform those with whom you conduct business that you are operating under a debt agreement.

Furthermore, while unsecured debt is dealt with in such an agreement, secured creditors may still seize and sell any of assets you’ve offered as security for credit, such as your house or car, if you are unable to meet your payments. Remember also that there are eligibility limits to the amount of debt you can have in order to propose an agreement.

Entering a debt agreement of this kind will also be marked on your credit file for up to five years or possibly longer, and your name will be listed on the National Personal Insolvency Index.

Your creditors are likely to be more positive about a proposed debt agreement, however, as they are a better chance to recover more money under the agreement than if you are declared bankrupt.

We’re here to help

As the details above show, there are options when you are unable to meet debt repayments either as an individual or a business.

Working out which option is best for you given your situation is often best identified by experts in insolvency matters such as Felicio Law Firm.

We bring a warm and understanding approach to our relationship with clients and can help you guide you through to a fresh start if you are facing the prospect of bankruptcy. Call us today for an initial consultation on (02) 4365 4249.