If you’re struggling to pay your bills, have mounting debts like credit cards and loan repayments, and your weekly income isn’t enough to cover day-to-day living expenses, you may be facing personal insolvency. Personal insolvency means you are unable to pay your debts when they’re due. Unmanageable debt isn’t always due to overspending, though this is a common cause. It can also result from factors outside of your control, such as severe illness, an accident, job loss, or a relationship breakdown. There are several options that may provide relief from unmanageable debt, but some can have long-lasting impacts on your credit score and may impose restrictions when applying for future finance.
This guide will take you through what options are available and how they impact your credit score.
Types of Personal Insolvency Options
Options into two categories: formal (legislated under the Bankruptcy Act 1966) or informal, which refers to a binding agreement with creditors. The severity of your financial situation will, in most cases, define the path you take.
Formal Personal Insolvency Options
There are four formal personal insolvency options available to you under the Bankruptcy Act, each having a varying level of consequence.
- Temporary Debt Protection (TPD): A TPD provides you with a 21-day protection period where your creditors can’t take further action to recover debts. This allows you time to seek guidance and decide on the best course of action.
- Bankruptcy: Bankruptcy lasts for 3 years and 1 day. Once this period ends, you are released from most debts. Due to its long-term consequences, it should be considered a last resort.
- Part IX (9) Debt Agreement: A Part IX (9) Debt Agreement is a legally binding agreement between you and your creditors to pay what you can afford.
- Part X (10) Personal Insolvency Agreement: This agreement involves paying an agreed amount in instalments or a lump sum to your creditors.
Informal Personal Insolvency Options
Informal Debt Agreement
An Informal Debt Agreement is a proactive solution set up between you and your creditors which allows you to repay your debts without the lasting consequences attached to other formal debt relief options. An Informal Debt Agreement aims to consolidate your debt into one easy-to-manage regular payment, reduce your monthly payments, reduce your interest rate, and create a more manageable plan for your debt so you can pay what you can afford. Informal Debt Agreements are outside the formal system, which means it won’t be marked on your credit file.
Temporary Hardship Plan
A Temporary Hardship Plan is a short-term relief option that lasts for 3 months, designed to ease financial pressure during challenging times. After a simple online application, we negotiate with your creditors to establish a manageable payment or, in some cases, allow a temporary break from payments. The plan aims to protect your credit score while providing immediate relief, with no adverse marks on your credit file.
Personal Insolvency Options and Your Credit File
In most cases, your individual financial situation will dictate the best solution to your unmanageable debt. If you can afford to repay the debt, avoiding Bankruptcy can prevent long-term impacts on your credit file. Instead, you might consider a Part IX (9) Debt Agreement, a Part X (10) Personal Insolvency Agreement, a Temporary Hardship Plan, or an Informal Agreement. These options are particularly suitable for those with assets to protect who want to avoid the stigma and restrictions of Bankruptcy.
What is Bankruptcy?
Bankruptcy is a legal process that releases a person from almost all of their debts. It lasts 3 years and 1 day from the day you file your statement of affairs. This option is generally best for those with severe debt and no realistic way to repay it. Bankruptcy can help eliminate debts, stop creditor harassment, and offer a fresh start.
When you declare yourself bankrupt, a Bankruptcy Trustee registered with the Australian Financial Security Authority (AFSA), will take control your financial affairs. It is also possible to be made bankrupt by one of your creditors through a court process known as a creditor's petition. Bankruptcy covers most debts, including personal loans, credit card debts, and money owed to the ATO. However, it does not cover HECS or HELP debts, child support, court-imposed fines, or damages from accidents.
Bankruptcy’s Permanent Effects on Your Credit File
While Bankruptcy can clear your debts and offer a fresh start, it significantly impacts your credit file. A record of your Bankruptcy remains on your credit report for 5 years, or 2 years after the end of your bankruptcy period—whichever is longer. Also, your name will be permanently listed on the National Personal Insolvency Index (NPII), a public electronic record of all personal insolvency proceedings in Australia. Although Bankruptcy makes it harder to get approved for credit, showing a consistent repayment history and stable income can improve your chances after the 5-year period.
Part IX (9) Debt Agreements
A Part IX (9) Debt Agreement (Debt Agreement) is also legislated under the Bankruptcy Act. It pauses your interest and allows you to propose a payment plan, typically over 3 years, based on what you can afford. Your creditors will vote to accept or reject the proposal, and there's an opportunity to negotiate the amount owed. In some cases, debts can be reduced to as low as 20% of the original amount, depending on the flexibility of creditors and your circumstances.
Debt Agreements are available only to those who meet specific asset and income thresholds. Once the agreement is accepted, essentially all of your creditors are bound by it.
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Impact of a Debt Agreement on Your Credit File
A Debt Agreement impacts your credit file for 5 years from the date it begins, or 2 years after completion—whichever is longer. It also appears on the NPII during that time. However, it does not have the same permanent consequences as Bankruptcy. Maintaining a positive payment record during a Debt Agreement can help demonstrate to lenders that you are capable of managing future financial obligations, potentially increasing your chances of getting credit later. You could also read our article on rebuilding your credit score after a debt agreement.
Impact of an Informal Agreement on Your Credit File
For those who fall outside the requirements, a Part X (10) Personal Insolvency Agreement or Informal Agreement may be available. An Informal Agreement can reduce your overall debt through negotiations with creditors. The repayment amount is calculated based on your income, living costs, and existing debts. Often, this means you repay only a portion of what you owe, with future interest paused, allowing for quicker and less stressful repayment.
While Informal Agreements are privately negotiated and won’t appear on the National Personal Insolvency Index (NPII), they may be marked as Financial Hardship on your credit file for up to 1 year after the arrangement ends, depending on the credit provider's reporting practices. This notation does not impact your credit score, but missed payments during the agreement can be reported and may negatively affect your credit rating.
The comparison table below shows the effects the different Personal Insolvency options have on your credit file.
| How Long Does it Last? | National Personal Insolvency Index (NPII) | Credit File | |
|---|---|---|---|
| Bankruptcy | 3 years and 1 day from the day you file your statement of affairs. | Your name will appear permanently. | A record of your Bankruptcy is kept for 5 years from the date you became Bankrupt, or 2 years from when your Bankruptcy ends; whichever is later. |
| Part IX (9) Debt Agreement | Typically 3 years (can extend to 5 years). | Your name will appear for 5 years from the date the Debt Agreement was made, or from the date the obligations are complete; whichever is later. | A record of your details is kept for up to 5 years. |
| Informal Agreement | Tailored to your circumstances. | Not listed. |
May show as Financial Hardship for 1 year after the arrangement ends, but it doesn't impact your credit score. |
| Part X (10) Personal Insolvency Agreement | Depends on what you negotiate with your creditors. | Your name will appear permanently. | A record of your details will be kept for 5 years, sometimes longer. |
| Temporary Hardship Plan |
|
Not listed. |
Your credit report may show an "A" for the arrangement and remain for 12 months, however it does not affect your credit score, and cannot be used for an automatic decline for future lending applications. |
Applying for Credit During or After Personal Insolvency
The Bankruptcy Act imposes threshold restrictions on borrowing for individuals currently bankrupt or in a formal Debt Agreement. If you seek goods or services on credit for more than $7,032, you must disclose your bankruptcy or debt status. This also applies to leasing, hiring, or promising future payments. After Bankruptcy or a formal Debt Agreement is completed, lenders will review your credit history before considering your application. secured loans are often easier to get than unsecured ones, as they pose less risk to lenders.
Check Your Credit Rating Before You Apply
After you have been declared a discharged bankrupt or have finished your Debt Agreement, it's a good idea to see where your credit score is at. You can get a free credit score check from a number of online providers such as Experian, illion, and Equifax. This report will show you the impact that Bankruptcy or a Debt Agreement has had on your credit score and give you an estimate of how long it might take to improve. Strengthening your credit before applying for a new loan will boost your chances of approval.
Regardless of whether you enter into a Part IX (9) Debt Agreement, a Part X (10) Personal Insolvency Agreement, or declare Bankruptcy, all formal personal insolvency options will affect your credit score to some extent. But if you can afford to pay back the debt by way of a Part IX (9) Debt Agreement or Part X (10) Personal Insolvency Agreement, then the impact on your credit file is far less harsh. If you choose to not pay back the debt and declare yourself bankrupt, then the effects are permanent. An Informal Agreement with creditors may not be suitable for every situation, as it requires creditor approval. However, when successful, it can be a beneficial solution since it won’t affect your credit file, allowing you to manage your debts privately without long-term credit consequences.
Need Help Navigating Personal Insolvency?
If your debt has become unmanageable and you’re unsure which insolvency option is right for you, our team of Customer Success Specialists is here to help. Call us on 1800 534 534 for confidential, professional, and non-judgemental advice. We’re dedicated to guiding you toward a debt solution that suits your situation and helps you regain control of your financial future.
