Bankruptcy vs. Debt Agreement: Which is Right for You?
When facing overwhelming debt, understanding your options is crucial. In Australia, bankruptcy and debt agreements are two common pathways to debt relief, but they differ significantly in their eligibility requirements, impact, and long-term consequences. Choosing the right option depends on your individual circumstances and financial goals. This article provides a detailed comparison to help you make an informed decision.
Eligibility Requirements
Before considering either bankruptcy or a debt agreement, it's essential to understand the eligibility criteria for each.
Bankruptcy
To declare bankruptcy in Australia, you generally must:
Be unable to pay your debts when they are due.
Reside or have a connection to Australia (e.g., have a business or property here).
Not have been bankrupt in the past three years (with some exceptions).
Attend counselling with a registered trustee prior to declaring bankruptcy.
There's no specific debt threshold to meet for bankruptcy. The key factor is your inability to pay your debts.
Debt Agreement
Debt agreements, governed by Part IX of the Bankruptcy Act 1966, have stricter eligibility requirements:
Your unsecured debt (debt not secured against an asset) must be below a certain threshold, which is indexed regularly. Check the Australian Financial Security Authority (AFSA) website for the current limit.
Your after-tax income must be below a certain threshold, also indexed by AFSA.
Your realisable assets (assets that can be easily sold) must be below a certain threshold, indexed by AFSA.
You must not have entered into a debt agreement or been bankrupt in the past ten years.
Debt agreements are generally suited for individuals with lower levels of debt and income who can afford to make regular repayments.
Impact on Assets
The treatment of your assets is a significant difference between bankruptcy and debt agreements.
Bankruptcy
In bankruptcy, most of your assets, including your home, car, and investments, may be sold by the trustee to repay your creditors. However, certain assets are protected, such as:
Reasonable household items.
Tools of trade up to a certain value.
Superannuation (generally protected, but contributions made shortly before bankruptcy may be at risk).
If you own a home with equity, it's likely to be sold. However, you may be able to negotiate with the trustee to keep your home by paying the equity to the bankruptcy estate. Learn more about Bankruptcy.
Debt Agreement
With a debt agreement, you generally get to keep your assets. This is a major advantage over bankruptcy. However, you must disclose all your assets to your creditors, and they will consider the value of your assets when deciding whether to accept your debt agreement proposal. The higher the value of your assets, the higher your repayment offer may need to be to gain creditor approval. Creditors may be less likely to accept a debt agreement if they believe you could afford to declare bankruptcy and repay a larger portion of your debt through the sale of your assets.
Repayment Obligations
The repayment obligations differ significantly between the two options.
Bankruptcy
In bankruptcy, you may be required to make income contributions if your income exceeds a certain threshold. These contributions are calculated based on your income and dependants and are paid to the trustee for distribution to your creditors. The obligation to make income contributions typically lasts for three years from the date of bankruptcy.
Debt Agreement
With a debt agreement, you propose a repayment plan to your creditors. This plan typically involves making regular payments over a set period, usually three to five years. The amount you repay will depend on your income, assets, and the amount of your debt. The repayment plan must be approved by a majority of your creditors (in number and value of debt).
Credit Rating Implications
Both bankruptcy and debt agreements have negative impacts on your credit rating.
Bankruptcy
Bankruptcy has a severe impact on your credit rating. It will be listed on your credit report for five years from the date of discharge (or two years from the date the bankruptcy ends, whichever is later). This can make it difficult to obtain credit, loans, or even rent a property during this period. You can learn more about Bankruptcy and how it affects your credit.
Debt Agreement
A debt agreement also negatively impacts your credit rating, although potentially less severely than bankruptcy. It will be listed on your credit report for five years from the date the debt agreement is accepted. While a debt agreement may appear less damaging than bankruptcy, it still signals to lenders that you have had difficulty managing your debts.
Duration of Agreement
The duration of each option also differs.
Bankruptcy
Bankruptcy typically lasts for three years from the date you file, unless you are automatically discharged earlier. However, certain actions, such as failing to cooperate with the trustee or incurring further debt, can extend the bankruptcy period.
Debt Agreement
Debt agreements typically last for three to five years, depending on the terms of the agreement. Once you have completed all the repayments outlined in the agreement, you are discharged from the remaining debt included in the agreement.
Suitability for Different Circumstances
Choosing between bankruptcy and a debt agreement depends heavily on your individual circumstances.
Bankruptcy Might Be Suitable If:
You have a high level of debt and limited assets.
You are unable to make any meaningful repayments.
You are willing to accept the loss of some assets.
You are comfortable with the restrictions imposed by bankruptcy.
A Debt Agreement Might Be Suitable If:
You have a lower level of debt and some assets you want to protect.
You can afford to make regular repayments.
You want to avoid the stigma and restrictions of bankruptcy.
You meet the eligibility criteria for debt agreements.
It's crucial to seek professional financial advice before making a decision. A financial counsellor or registered trustee can assess your situation and help you determine the best course of action. They can explain the implications of each option in detail and help you navigate the process. Consider what we offer in terms of guidance and support.
Key Considerations:
Debt Level: Higher debt levels often favour bankruptcy, while lower levels may be suitable for debt agreements.
Asset Ownership: If you have significant assets, a debt agreement might be preferable to protect them, but this will impact your repayment offer.
Income: Your income determines your ability to make repayments under a debt agreement and whether you'll be required to make income contributions in bankruptcy.
- Future Prospects: Consider your future income potential and ability to manage your finances after either option.
Ultimately, the best choice depends on your unique financial situation and goals. Carefully weigh the pros and cons of each option and seek professional advice to make an informed decision. You can also find answers to frequently asked questions about bankruptcy and debt agreements online.