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Debt Agreements vs. Declaring Bankruptcy: A Comparison

Rachel Horan

Rachel Horan

June 9, 20214 minute read
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If your debts are spiralling out of control, it can be overwhelming to work out how to take back control of your finances. Generally, there are two main routes you can consider: a debt agreement or declaring bankruptcy. Neither of these options should be entered lightly and each can come with consequences.

On this page:

    In this guide, we compare debt agreements vs. bankruptcy and look at some other alternatives to consider before exhausting these two options.

    What is a debt agreement?

    A debt agreement, also known as a Part IX (9) Debt Agreement, is a formal way of settling your debts without declaring bankruptcy. In this agreement, you can negotiate with your creditors to pay a percentage of your debts over an agreed period of time. After this agreed amount has been paid, your debts are considered settled.

    To be eligible to enter a debt agreement, you’ll need to meet the following requirements:

    • Currently insolvent;
    • You must not have been bankrupt, entered a debt agreement, or given an authority under Part X (5) of the Bankruptcy Act of 1966 in the last ten years;
    • You must be under the set limits stated by the Australian Financial Security Authority (AFSA) for unsecured debts, assets, and after tax income for the following 12 months.

    Is a debt agreement the same as an informal debt agreement?

    Part IX (9) Debt Agreements is regulated and monitored under the Bankruptcy Act of 1966. Unlike a formal debt agreement, an informal agreement is privately negotiated with your creditors to reduce your minimum repayments, pause your interest, or extend your repayment period. Since they are private arrangements, it is completely dependent on the cooperation of your creditors to agree to the terms. In addition, the lender can cancel the agreement at any time, at which time you are required to comply with your original arrangement.

    What is declaring bankruptcy?

    Declaring bankruptcy is the formal process in which you are declared, either voluntarily or by an external party, unable to pay your debts. When you have been declared bankrupt, you are released from paying most of your debts. In some instances, you may not be released from debts. For instance, if you have a secured loan, the creditor could still repossess your asset towards payment of the outstanding debt.

    A trustee is appointed to look after your affairs, meaning that they are in control of all your assets for the duration of your bankruptcy.

    There are two ways to become bankrupt:

    • You can lodge a debtor’s petition to become bankrupt with the AFSA;
    • A creditor can petition for you to be declared bankrupt if you owe them more than $5,000.

    There are some debts you are not exempt from paying, even during bankruptcy including:

    • Court imposed penalties and fines;
    • Student assistance of supplement loans (e.g. HELP, HECS, SFSS);
    • Debts incurred after you’ve entered bankruptcy;
    • Debts you are liable to pay due to accidents where the payable amount has not been fixed.

    Debt agreements vs. declaring bankruptcy

    If you’re considering a formal debt agreement or declaring bankruptcy, it can be difficult to know which path to take. To help you make a decision, we’ve outlined the implications of a debt agreement and declaring bankruptcy below:

    Debt Agreement Declaring Bankruptcy
    Listed on your credit report for five years or more. You stay bankrupt for three years, and your bankruptcy stays on your credit report for five years.
    You must tell new credit providers about it (if you owe more than the credit limit by the AFSA). A trustee looks after your affairs.
    Your name is on the National Personal Insolvency Index (NPII) for five years or more. Your name is on the National Personal Insolvency Index (NPII) permanently.
    You may not be able to work in certain professions. You can’t be a director of a company without court permission. You also may not be able to work in certain professions.
    You are not limited in overseas travel plans. You must ask your trustee for permission to travel overseas.

    Are there any other alternatives?

    Entering a debt agreement or declaring bankruptcy can have serious long-term consequences. If you haven’t already, you might want to consider the following options:

    Informal debt agreement

    As mentioned earlier, an informal debt agreement is a private arrangement between you and your creditors to help you better manage and repay your debts. Even though the creditor is not obligated to agree to your terms, it is considerably less damaging than a formal agreement like a Part IX (9) Debt Agreement or bankruptcy. This is because you will not be listed on the NPII, the agreement itself isn’t listed on your credit report, and you will not be limited in your employment options.

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    An important note:

    If your credit providers use comprehensive credit reporting (CCR), the repayment history will be evident in your credit file. It could also be accessed through a suitability assessment conducted by the creditor. Meaning, prospective creditors could be able to see evidence of a 'hardship arrangement'.

    Consolidation loan

    A consolidation loan can be a useful tool to help you get on top of your debt. With this option, you can streamline multiple debts (e.g. loans, credit cards, utilities) into one repayment plan. This will result in one single, smaller repayment amount which can be more affordable, as it has reduced your commitment level. However, any costs of taking out another loan should be factored into this calculation.


    Copyright © www.jacarandafinance.com.au Jacaranda Finance Pty Ltd ® ABN 53 162 078 195 Australian Credit Licence 456 404, Pawnbroking License Number 4221738. The information on this web-page is general information and does not take into account your objectives, financial situation or needs. Information provided on this website is general in nature and does not constitute financial advice.


    Rachel Horan
    Rachel Horan

    Written by Rachel Horan

    Rachel Horan is a Content Writer for Jacaranda Finance. Rachel has previously produced content for Brisbane City Council, Black & White Cabs, and Clubs Queensland. She has a Bachelor of Mass Communication with Distinction from the Queensland University of Technology.

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