Bankruptcy vs. Debt Agreements: Which is Right for Me?Bankruptcy Articles > Article: Bankruptcy vs. Debt Agreements: Which is Right for Me?
Depending on the severity of their debt, debtors might believe their only finance option is filing bankruptcy. However, the consequences of filing bankruptcy can be extremely hurtful to your credit. Researching other options (including a Debt Agreement) is a priority. Two of the most common debt arrangements are bankruptcy and debt agreements:
- A bankruptcy occurs when an individual is unable to pay their creditors the debt they have accrued. To become bankrupt, debt-holding individuals must file proper paperwork with the Insolvency and Trustee Service Australia (ITSA). This is called a voluntary bankruptcy. A less common form of bankruptcy is an involuntary bankruptcy in which a creditor files a petition for bankruptcy against a debtor. In doing this, the creditor is attempting to recover a portion of the money they are owed.
- A Debt Agreement is an agreement that legally binds a debtor and their creditors to negotiate a repayment plan. To enter into a Debt Agreement, debt-holding individuals must file the proper paperwork with the ITSA. The creditors must then approve the proposed agreement.
Before entering into either agreement, debtors should research the benefits and challenges of each arrangement. Some debtors will find that filing bankruptcy is, unfortunately, more beneficial for them than filing for a debt agreement. Others may find that they cannot be approved for a debt agreement.Â Researching options is key in saving the debtor time. By saving time, the debtor is closer to resolving the issue with their creditors.
- Takes the pressure off the debtor, who will not have to communicate with creditors (trustee does this for them).
- Debtors who file bankruptcy will not be forced to pay back any debt to an unsecured creditor (they do not hold security over the debtor's assets). These creditors are unable to take any action against the debtor.
- Accruing interest on debt is frozen
- debt agreement administrator communicates with creditors on the debtor's behalf
- Takes the pressure off the debtor: creditors cannot pursue them.
- Less harmful on the debtor's credit file than bankruptcy
- The debtor is responsible for one regular, set payment. They do not have to manage several payments.
- Loss of assets including (but not limited to): lottery wins, equity accrued on a mortgage, stocks and bonds, any prize of monetary value, shares, any personal property that has value, land, vehicles exceeding $5,800 in value, and money in bank accounts.
- Bankrupt parties are unable to travel outside of Australia without consulting their trustee. The bankrupt party needs approval to travel abroad.
- Failing to follow the rules of bankruptcy can lead to legal action including: legal prosecution (up to 3 years of time in prison) and lengthening your bankruptcy (up to 7 more years).
- Some creditors might be unwilling to negotiate. Creditors are not required to accept debt agreements.
- For a better chance at cooperation, a debtor might consider hiring a debt agreement administrator. The debt agreement administrator will require a fee upfront. If your debt agreement is not approved, the expense is a waste.
- If the debtor finds they are unable to keep up with the required payment (after being approved for a debt agreement,) their debt problems and credit rating could worsen. Debtors must meet payments on time for the debt agreement to benefit them.
Do I qualify for bankruptcy or a debt agreement?
You can apply for bankruptcy if:
- You do not qualify for a Debt Agreement
- You do not currently have a Debt Agreement in place
- You are a resident of Australia, own a house or business in Australia, or are present in Australia when you lodge your bankruptcy debtor's petition.
You can apply for a debt agreement if (These values change each year (check the itsa website for more information here) .:
- You have not filed bankruptcy, entered into another debt agreement, or been authorized for Part X of the Bankruptcy Act in the last 10 years
- After taxes, your income is lower than $55,000
- You have less than $75,000 (approximation) in unsecured debts
- Your property has not been released from liability because of a bankruptcy and the value remains higher than $75,000 (approximation).
People with debt below $12,000 commonly file for bankruptcy. In this situation, where their debt fits the qualifications for a debt agreement, a debt agreement should have been considered. Debt agreements are available for anyone with under $83,647.20 of personal debt and a net income below $62,735.40. If you fall into this category, you should consider using a debt agreement in lieu of filing for bankruptcy. (Last updated May 2009)