Debt agreement vs bankruptcy - understand the differences before deciding


After understanding the pros and cons of a debt agreement, you may still be weighing up whether a debt agreement or bankruptcy is right for you.

Both are formal insolvency appointments that have their respective benefits and are suitable for differing circumstances. It’s important to fully understand both so that you arrive at the right decision for you.

So let’s jump right in with a quick overview of each…


Bankruptcy releases you from your debts. Although valuable assets may be required to be sold, you can keep certain property. All debts are released apart from a select few, and there are certain restrictions around being a company director, obtaining credit and trading a business.

Your income is assessed annually to determine whether you must make income contributions. Additionally, transactions you entered into before bankruptcy will be reviewed to determine whether any assets or property you disposed of may be recovered.

You can either voluntarily file for bankruptcy by way of a debtor’s petition or be made bankrupt by one of your creditors.

Bankruptcy automatically lasts for three years from the date you lodge your Statement of Affairs. However, in some cases, this can be extended to five or eight years if a bankrupt person does not comply with their duties.

There is currently a bill before Parliament that proposes reducing the term of bankruptcies to one year. It will apply retrospectively so that someone going bankrupt before the bill becomes law (if it does) will be discharged from bankruptcy as soon as they reach one year.

Debt Agreement

A debt agreement is a formal arrangement with your creditors where you agree to pay a sum of money towards your debts over time.

You propose the amount of contributions to be made, the time period for payment, and whether any assets are to be included. Your creditors then vote to accept or reject your proposal.

Importantly, debt agreements are only available to people with net debts or assets of less than $111,675 and after-tax income no greater than $83,756. For those outside this threshold, a Personal Insolvency Agreement is similar; or other options are available.

For eligible individuals, the process is straightforward. It is all arranged through a Debt Agreement Administrator (DAA) under the Bankruptcy Act.

If accepted, all creditors are bound to the agreement, regardless of whether they vote. A majority of your creditors need to vote in favour for it to be accepted, but not all creditors need to vote.

Once accepted, your payments are consolidated into affordable instalments that you pay to your DAA over a number of years.

Debt Agreement or Bankruptcy? A quick comparison…

So which is right for you? Debt agreement or bankruptcy?

A quick summary of the similarities and differences between the two should help you decide:

Thresholds to eligibility for Appointment?NoYes, see AFSA’s indexed amounts
Recorded on NPII and Credit Score?YesYes
Income Contributions Required?Yes, if income exceeds threshold amounts.

Generally, no unless terms of agreement requires it. But regular instalments are generally paid from income.
Can you be a company director?NoYes
Can you trade a business as a sole trader?Yes, but under your own name.Yes, unless terms of agreement say otherwise.
Can you keep your assets?Generally no, unless they’re exempt under the Bankruptcy Act. Further information here and there are ways to retain your home.Yes
Can assets sold/payments made prior to bankruptcy be recovered?YesNo
Released from debts?Upon discharge from bankruptcy but some debts not released.Upon completing terms of agreement, but some debts not released.
Ability to travel overseas?Yes, but need prior consent of trustee.Yes
Costs/Fees to be paid by individual?No. Although if filing voluntarily a bankruptcy trustee (not AFSA) may seek an up-front payment if insufficient assets/income contributions to cover costs.Yes, there are fees that need to be paid to AFSA and your DAA. This usually includes a $200 application fee with AFSA and around 25% of your ongoing payments to your administrator (so if you’re paying $1000/month your administrator will take $250/month).
Percentage of total debts to be paid?N/A. Dividend paid only if sufficient funds realised from assets, income contributions or recoveries. Creditors receive average returns of between 1 and 4 c/$.On average 60c/$ returned to creditors. Including DAA fees, the average cost of a debt agreement is 85% of total debts.
Can you keep an inheritance you become entitled to?YesYes

For a full list of similarities and differences between these options, see the following:

Nothing beats speaking to a professional to ensure that you fully understand your options. If you’d like to chat or need help right now, get in touch through the chat window on our site or contact us here.

Posted on 22-02-18 in ATO Debts, Business, Business insolvency, Business Solutions, Corporate liquidation, Debt Agreements, Debt management, Liquidation, Pre-Insolvency Advice.