Introduction

You may find yourself in a position where you have borrowed money and have driven up your debts, but you can no longer repay them. You may even have creditors to whom you owe money persistently chasing after you. You may have reached a point where the unmanageable debts are no longer merely causing financial stress, but also impacting your physical and mental health. So, what are your legal options?

The Bankruptcy Act 1966 (Cth) and associated legislation, including Bankruptcy Regulations 2021 and Insolvency Practice Rules (Bankruptcy) 2016, provide a range of options to individuals who find themselves in the position described above.

The three main options provided to individuals under the Bankruptcy Act are:

• Entering into a debt agreement (Part IX);
• Entering into a personal insolvency agreement (Part X); or
• Voluntarily declaring or being forced into bankruptcy.

The relevant legislation also provides a solution to affected creditors, as the available assets may be distributed amongst them.

The Australian Financial Security Authority (“AFSA”) is a government agency that handles bankruptcy applications of individuals and manages the application of the relevant bankruptcy laws. 

Debt Agreement

A debt agreement (also known as a Part IX) is a legally binding agreement that is formed between you and your creditors. Instead of declaring bankruptcy, a debt agreement offers a more flexible approach which allows you to make arrangements to settle your existing debts.

A debt agreement is formed through negotiation between you and your creditors. Essentially, you will negotiate to repay a particular percentage of your combined debt over a period of time. This negotiated percentage will be one that you can realistically afford. Instead of making individual repayments to each of your creditors, the repayments will go through your nominated debt administrator (an eligible person nominated by you to handle the debt agreement on your behalf).

Debt agreements have become an increasingly popular alternative in Australia, as it enables you to avoid bankruptcy and the consequences which flow from it. The agreement may also enable creditors to recover a greater amount of money than if you were to become bankrupt.

However, it is important to be fully informed of the possible legal and financial implications of signing a debt agreement. In some cases, it may be possible to negotiate repayment arrangements or debt waivers through financial hardship schemes or take part in external dispute resolution, instead of entering into a debt agreement.

Before entering a debt agreement, it is important to be aware of the following:

• The limits in terms of the amount of debt you can have and income you can earn, in order to be eligible for a debt agreement;
• Debt agreements are unable to release you from all types of debts, thus some debts will still need to be paid;
• There exist other formal options, such as personal insolvency agreements;
• Debt agreements may carry serious consequences and may impact your ability to obtain credit in the future;
• It will appear on a public register for a certain period of time;
• There are fees involved in the process of proposing and managing the debt agreement; and
• A debt agreement usually lasts for up to 3 years. It may be possible to propose an extension to increase it to 5 years if you own your own home, or if unforeseen circumstances arise.

What debts does it cover?

Unsecured debts:

Though debt agreements are designed to release you from most unsecured debts, you may still be required to pay particular types of debt that remain after the obligations of the agreement have been satisfied.

This means that in some cases, although you have satisfied and completed your obligations under the agreement, if you still have other debts remaining, those respective creditors may choose to pursue you for those debts.

Unsecured debts are those which are not secured by collateral (i.e. where no security is provided) and are therefore not tied to specific property, such as a house. The types of unsecured debts which are covered by a debt agreement include:

• Credit cards;
• Unsecured personal loans;
• Some utility bills (such as gas, electricity, and internet bills);
• Overdrawn bank accounts;
• Unpaid rent; and
• Medical or legal fees.

While debts that you may remain liable to pay include:

• Debts incurred subsequently to the date at which the proposal of the agreement is received;
• Student loans; and
• Court fines.

The debt comparison table that can be found on the AFSA website (https://www.afsa.gov.au/insolvency/cant-pay-my-debts/debt-comparison-table) may prove helpful in determining which unsecured debts a debt agreement will cover. If you are still unsure whether a creditor can pursue you for debts such as those incurred by fraud or overseas debts, you may be required to consult the relevant creditor and check. 

Secured debts

It is important to recognise that creditors are still able to pursue you for secured debts. Secured debts are those which are tied to property. Examples of secured debts include:

• Mortgages (in which case the house is security); and
• Car loans (where the vehicle is security).

If you find yourself in a position where you are unable to make repayments, the creditor will be able to repossess the property and sell it to pay off the debt. However, in some instances, this will not be enough to cover the debt and thus there will be a ‘shortfall’. The shortfall is the amount by which the financial obligation exceeds the amount of cash available from the sale of security assets. It is possible for a secured creditor to participate in the debt agreement and receive payments for the shortfall owed.

 Joint debts

Joint debts are those which are shared with another individual. This type of debt can be included in the agreement. However, it is important to bear in mind that unless both individuals are included in a debt agreement, the non-participating party may still be pursued by a creditor.

Tax debts

It is also possible for one to accumulate tax debt if you do not pay the tax balance in full by the due date. Australian Taxation Office (ATO) debts can be included in the debt agreement, though the ATO may keep your tax refunds if you owe a debt to the Commonwealth.

Personal Insolvency Agreement

A personal insolvency agreement (PIA) (also known as a Part X) is the second agreement option available. Like a debt agreement, a PIA provides a flexible option and is a legally binding agreement between you and your creditors.

This agreement involves you appointing a trustee, who will take control over your property, and they will be the one that makes an offer to your creditors. The offer may consist of the proposal to pay off a certain amount of the debts by a lump sum or through instalments. Since it is considerably more flexible and is not limited by the restrictions of bankruptcy, the agreement allows for the arrangement to be tailored to the unique circumstances of the debtor in question.

How does a Personal Insolvency Agreement (PIA) differ from a Debt Agreement?

• A PIA involves the appointment of a trustee;
• Unlike for debt agreements, there is no eligibility criteria for entering into a PIA (no debt, asset, or income limits);
• The length of the PIA is open to negotiation with your trustee and creditors; and
• A PIA will appear on a public register permanently.

It is also important to be aware of the following:

• There are still fees involved to propose, lodge, and manage the agreement. Additionally, since fees charged by trustees vary, you should be aware of the fees that the trustee will charge prior to entering the agreement; and
• Like debt agreements, the PIA may not release you from all your debts.

What are the consequences?

Though a PIA provides a flexible approach for dealing with unmanageable debts, a PIA may nonetheless impact the following:

• Your employment;
• Your ability to obtain credit; and
• Will be visible on a public register permanently.

Bankruptcy

Bankruptcy is usually considered to be the last resort option and is the point at which you are declared unable to pay your debts.

Voluntary Bankruptcy

Failure to negotiate with your creditors and reach an agreement as to repayments, may result in the decision to declare oneself bankrupt. It is possible to enter voluntary bankruptcy yourself, by completing a Bankruptcy Form and lodging it with AFSA.

Court Ordered Bankruptcy

The alternative is that one of your creditors may choose to make you bankrupt through a court process. If the court hands down a sequestration order, you will be made bankrupt. After receiving the order, control of your assets will pass to a trustee. It is possible to seek a review of the order and to therefore challenge it. If you find yourself in this position, it is important to consider the following:

• The consequences which may flow from bankruptcy;
• Whether you have grounds to review the making of the order. For example, you may not have been served with the bankruptcy notice;
• You may be required to pay the legal costs of the other side, even if you are successful in your application; and
• There exists a 21-day time limit for making an application for a review.

The process

Bankruptcy normally lasts for a period of 3 years and 1 day. Once you become bankrupt, a trustee will be appointed to manage your bankruptcy. The trustee appointed may be either the Official Trustee (AFSA), or a registered trustee that the petitioning creditor nominates. You will need to provide information about your debts, assets, and income to the trustee. You will also be required to provide information about any changes to your circumstances during this period.

Role of the trustee

The trustee will take over in many aspects, including but not limited to the following:

• Manage your bankruptcy and will work with you and your creditors to help reach a fair outcome for all involved;
• Notify your creditors that you are bankrupt, thus preventing them from contacting you directly;
• Take control over most of your assets;
• Can sell particular assets to pay off your debts;
• Take control over your financial affairs; and
• Can issue dividends to identified creditors.

However, it is important to remember that trustees may take a proportion of your income or tax your assets, to cover their own fees.

What are the consequences?

Though bankruptcy allows you to financially make a fresh start, there are several consequences which may flow from it. These include the following:

• Certain restrictions imposed in relation to your employment and running a business;
• Not all debts are covered by bankruptcy and thus, you may still be liable to repay the remaining debts. Even though most unsecured debts are covered, there exist some exceptions;
• To travel overseas, you must request permission from your trustee. Failing to obtain written consent will constitute an offence under the Bankruptcy Act;
• Your name will permanently appear on the National Personal Insolvency Index (NPII) and is searchable by the public;
• Your ability to obtain future credit. You must provide information about your bankruptcy to a potential creditor if it is over a certain amount;
• Credit reporting agencies will keep a record of your bankruptcy for a period (either 5 years from the date you became bankrupt or 2 years from the date your bankruptcy ends, whichever is later);
• You must declare any assets you possess and must not dispose of or sell any that are deemed to belong to the trustee. The trustee has the power to sell your assets, such as your house; and
• You may not be able to take legal action or participate in court proceedings.

It is important to be aware of the set limits that exist in relation to bankruptcy. For instance, if you earn over a set amount of income, you may be required to make payments to the trustee. It is also important to recognise that if you are declared bankrupt, your name and other details, such as your address and the status of any proceedings you are part of may be visible on a public register.

Choosing between the available options

If you find yourself in the position where you are considering which option may prove to be most beneficial to you, it is important to remember to:

• Seek advice from financial counsellors, as they can provide you with free, independent, and confidential advice and guidance on the steps to take next;
• Be aware of the options you have under the Bankruptcy Act and other options available, such as reaching an agreement with your creditors or requesting temporary debt protection for 21 days; and
• Recognise and understand that there are consequences which may flow from the option you choose to deal with your unmanageable debts.