Debt Agreements vs Bankruptcy Explained

Debt Agreements vs Bankruptcy

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Many thousands of Australians have difficulty in managing their debts each year and some people reach a point where the stress and worry becomes overwhelming.   If this is you, you are probably trawling the Internet for answers or seeking the advice of family and friends.

There are a few options for dealing with unmanageable debt and there is a lot of information available about those options.  Because every person’s circumstances are different, it is sometimes difficult to apply the benefits and consequences to given circumstances.

It is helpful to talk to a debt expert or a financial counsellor about your particular circumstances and the options that will be most beneficial to you.  A debt expert should be able to tell you fairly quickly whether you are eligible for a particular course of action and the likely short and long- term impacts.

Many people having difficulty with debt consider the difference between debt agreements and bankruptcy but find that the variables in eligibility and outcomes make it a bit confusing.  Here we briefly explain the differences and how they, and the consequences, might affect you.

Debt Agreement

A debt agreement will save you from having to declare yourself bankrupt.  A debt agreement works by reducing the overall debt, freezing the interest and giving you time to pay back the debt.

In other words you propose to pay back an amount that you can afford, usually in periodic payments (weekly, fortnightly or monthly) for the life of the agreement, usually 4-5 years.  Your creditors have the opportunity to vote on this proposal, and if agreed a debt agreement begins.

Once you enter into a debt agreement with creditors, they can no longer harass you as they are legally bound to the contract that they have entered into with you.

It is most usual to appoint a debt agreement administrator who will help you put a proposal together, take your periodic payment and ensure that all creditors are paid and that everything is on track.

There are some eligibility criteria for debt agreements.  You have to earn below a certain amount and your assets cannot exceed a certain limit.  You also cannot have been party to an insolvency arrangement in the last 10 years.


People who are not eligible for a debt agreement but cannot manage their debts, may consider whether bankruptcy would be right for them.

While bankruptcy does not have the same eligibility criteria, it does have some serious consequences.  You want to be sure that choosing this option will not disadvantage you in the long term.

If you declare yourself bankrupt, you are cleared of all your unsecured debts, although your secured debts may be sold to pay your creditors and part of your wages (depending on how much you earn) can be taken to pay your creditors.


The major differences between the two options are that the consequences of bankruptcy can be longer lasting and more restricting.  For example, in some cases bankruptcy may affect career options and the amount of take home pay.   This is because some professional bodies will not license or register a bankrupt and earnings over a certain amount could be used to pay back creditors.  In some cases, your assets can be sold to pay off creditors.  Not everyone will be affected in this way by bankruptcy, so it is worth getting some expert advice.

For some, the difference in consequences between the two options will have a huge impact while for others the difference will be negligible.  That is why it is so important to seek expert advice before you make a decision about the best course of action for you.

The table below will help you to consider the differences and the likely impact the consequences will have on you and your loved ones.

Debt Agreement


How it works

You continue to repay some of your debts at a level and rate that you can afford. Interest on your unsecured debts is frozen. You will make periodic payments or lump sum payments to cover all the debts in the agreement

You will not have to continue to pay your debts but you will be subject to a number of restrictions in the future


You will be released from your debt once all agreed payments are made and the agreement has been completed

You will be released from your unsecured debts, not including penalties, fines and child support debts.

You will be able to keep your assets and property (if you default on payments for secured assets, a creditor may sell the secured property)

Your assets, including property, may be sold to repay your creditors (you may keep some tools of trade and your car, depending on their value)

Your wages are not affected

Some of your wages may be taken to repay your creditors, if you earn over a certain amount.

You will not be recorded as a bankrupt

You will be recorded as a bankrupt for a minimum of 3 years

You will have no employment restrictions associated with your debt agreement

You may experience some employment restrictions, depending on your profession or trade

Your name will be recorded on the National Personal Insolvency Index (NPII) for a limited time

Your name will be recorded on the National Personal Insolvency Index (NPII) for life

You must declare that you have a debt agreement when applying for credit, over a certain amount

You must declare you are a bankrupt when applying for credit, over a certain amount

Your credit rating will be affected for 5 years

Your credit rating will be affected for 5 years

There are no restrictions for traveling overseas

You may be restricted from travelling overseas while a bankrupt

If trading under a business name or assumed name (whether alone or in partnership) the debt agreement must be disclosed to all people dealing with the business

If you are in a business and trade under a business name different to your own, you must tell everyone you deal with that you are bankrupt

These are the major 7 differences between bankruptcy and a debt agreement.

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