When it comes to a Debt Agreement vs Bankruptcy, which debt relief solution is best?
When people fall into bad debt, they can turn to a number of debt relief solutions to help them out of trouble. There are two legislated solutions available to clear your unsecured debt: a Part IX (9) Debt Agreement (Debt Agreement) vs Bankruptcy. If you have been struggling with your debt of late, you may have heard of a Debt Agreement. A Debt Agreement is a legally binding agreement between you and your creditors which outlines a new, affordable repayment arrangement. It pauses your fees and interest and allows you to repay only a percentage of each dollar you owe to your creditors.
Whether a Debt Agreement or Bankruptcy is the better solution comes down entirely to your unique situation. While it might be more beneficial for some people to declare bankruptcy, it has a number of restrictions and long-term consequences, which can make it a difficult option for some people to consider. For example, if you own a home, you might prefer to enter a Debt Agreement to keep your house. But if your debts are beyond control and you have lost a steady source of income, Bankruptcy would be better.
To help you make an informed decision about which debt relief solution is right for you, we've touched on some of the key differences between the two. This is a Debt Agreement vs Bankruptcy in the ultimate battle of debt relief solutions:
| Part IX (9) Debt Agreement | Bankruptcy | |
|---|---|---|
| Amount of Debt | Only unsecured debts may be included in a Debt Agreement. The combined value of these debts cannot exceed the threshold amount set by the Australian Financial Security Authority (AFSA). You can check the threshold amount here – it is updated twice annually. | There is no limit on the amount of debt to declare bankruptcy. Whether you owe $2,000 or $200,000, declaring bankruptcy indicates to creditors that you lack the funds or assets to cover the debt. A Trustee will then sell your assets and cap your wages to repay your creditors. However, for unsecured debts under $10,000, bankruptcy should be a last resort. |
| Earning Capacity | You can't propose a Debt Agreement if your after-tax income for the year is over the limit set by AFSA. However, you must still earn enough to cover your Debt Agreement repayments, which often excludes those without income. Once in a Debt Agreement, there is no limit to the income earned. | During bankruptcy, you cannot earn over the threshold amount set by AFSA without contributing to your debts. If you earn over the income threshold, then half of any income above the threshold goes towards repaying creditors. The applicable threshold depends on the number of dependants you have. |
| Operating a Business | You are able to continue to be a director of a company and run your business, but you may have to disclose your Debt Agreement to others who deal with your business. If you trade under a business name that isn’t your own, you must tell people you do business with that you're in a debt agreement. | You cannot be a director of a company or be involved in its management without permission of the court. You may be able to operate a business while bankrupt but in some industries, you must disclose that you are bankrupt. As a sole trader, you can operate a business but must declare your status when seeking credit over $5,000. |
| Owning Property | You may own property while in a Debt Agreement. However, if you are planning to purchase a new property whilst in it, you may find it difficult to secure finance. As long as you maintain the minimum repayments on your mortgage, you may own property. | You cannot own property while you are bankrupt. Any property or share in a property you own will be sold by your trustee. The proceeds from the sale will go to your creditors. However, there are ways you can keep your family home under certain conditions. |
| Owning a Car | There are no restrictions on the number or value of vehicles you own while in a Debt Agreement. Secured loans, such as car loans, cannot be included and must be repaid separately from Debt Agreement repayments. | The value of the car you drive must not exceed an indexed amount set by AFSA. If your vehicle exceeds this amount, it will be sold by your trustee. It might also be repossessed if it was secured against a loan. |
| Credit Rating | A Debt Agreement is noted on your credit file generally for 5 years as long as you keep up with repayments. After that, the Debt Agreement will be removed from your credit file. Your name will be listed on the National Personal Insolvency Index until the agreement ends, or 5 years from when it was made, whichever is later. | Bankruptcy is marked on your credit file for a minimum of 5 years. The period of Bankruptcy generally lasts for 3 years. Once your bankruptcy is over, it will remain on your credit file as a 'discharged bankrupt' for a further 2 years. Your period of bankruptcy may be extended up to 7 years by your trustee. |
| Travelling Overseas | There is no restriction on travelling overseas when you are in a Debt Agreement. | You are able to travel overseas while you are Bankrupt, but you must apply for written permission from your Bankruptcy Trustee before you go. Each application will cost $150. |
In the debate of Debt Agreement vs Bankruptcy, the best solution depends entirely on your individual circumstances. A Debt Agreement is a less intrusive method of repaying your debts, making repayments more affordable and allowing for quicker financial recovery once it has ended. On the other hand, Bankruptcy can provide relief when debts are unmanageable and income is insufficient, despite its many long-term, restrictive consequences. Both debt relief solutions have their place in Australia and are proven methods of helping you overcome bad debt.
If you aren't sure which debt relief method is the best for you, call Revive Financial for an obligation free chat. Our Customer Success Specialists will take the time to get to know you and your debt situation before recommending a personalised solution to your debt. You can call us at 1800 534 534.
For more information on Debt Agreements, check out our Debt Agreement page here.
For more information on Bankruptcy, check out our Bankruptcy page here.