The 3 Types Of Bankruptcies

Bankruptcy can feel like the end of the world. In light of the fact that life circumstances have made it impossible for you to meet your financial obligations, you may feel very discouraged. However, you might want to see bankruptcy as a new lease on life. You can take care of your debt in a manageable way by filing for bankruptcy and you can start rebuilding your credit.

There are 3 types of bankruptcies Australia

The Bankruptcy Act provides 3 possible solutions for your overwhelming debt. The 3 types of bankruptcies Australia are a Debt Agreement, Personal Insolvency Agreement, and Bankruptcy.

Debt Agreements are informal voluntary arrangements between you and your creditors that bind them to accept reduced payments in exchange for you not walking away and continuing to pay the reduced amount. This is a good choice if you can commit to making regular payments, but it must be affordable and approved by the Australian Financial Security Authority (AFSA). 

Personal Insolvency Agreements involve an individual voluntarily entering into an agreement with their creditors in order to resolve their debt. The agreement requires both parties to agree on the terms of repayment of the debt, which may include monthly payments, asset sale or transfer. This option should only be used as a last resort when all other attempts at resolving debt have failed as you must attend a meeting of your creditors for creditors to vote on whether they will accept your proposal. Our experience is that the meeting can be highly stressful and some people end up committing to repay an amount they cannot afford. Persons proposing a PIA should be careful. Bankruptcy is another way out from debt and offers individuals who are unable to pay off their debts within a certain time period protection from legal action taken by creditors. All of your debts that are caught by bankruptcy are extinguished without cost or obligation. Bankruptcy also stops creditor harassment, gives people relief from debt collection and  having their wages garnished. With bankruptcy, your debts are cleared without you undertaking to pay money to your creditors. 

3 Types of Bankruptcies Explained

There are different types of bankruptcy available in Australia, and understanding them will help you determine which is the best solution for your financial situation. Let’s take a closer look at the 3 types of bankruptcies and how it could affect you:

Debt Agreement

A Debt Agreement, also known as a Part 9 Debt Agreement, allows you to settle most of your debts that cannot be paid by reducing the amount you owe and organising for you to pay the reduced amount by monthly instalments over three or five years. This arrangement takes place under the Bankruptcy Act 1966 and involves submitting a proposal to your creditors for their consideration. It involves paying creditors in instalments, which are managed by a Debt Agreement administrator who is paid out of the funds you contribute. Creditors must vote to accept your proposal before it goes ahead, and this process usually takes 6-8 weeks. After all payments have been completed in accordance with the agreement, no further money needs to be paid and creditors cannot take any additional action against you. To enter a Debt Agreement, you need to prepare a document and lodge it with the Australian Financial Security Authority (AFSA). Typically, 20% of the funds are allocated to the administrator while 7% go to the Federal Government.

Personal Insolvency Agreement (PIA)

A Personal Insolvency Agreement, often referred to as Part X or Part 10, is a legally binding contract between a debtor and their creditors with the aim of satisfying outstanding debts. These agreements are regulated by the Bankruptcy Act 1966 in Australia and can be a more flexible way for debtors to address financial woes than bankruptcy. By entering this agreement, creditors agree to reduce the amount they are owed and debtors commit to making regular payments over a period of time. While a PIA is in place creditorscan not pursue any further legal action. There are several advantages, such as protection against creditors’ pressure and further legal action which enables debtors to maintain essential goods like furniture and whitegoods without having them sold off for debt payment. The disadvantage of a PIA is that they are costly to put in place and you need to attend a meeting of your creditors to try to negotiate the terms of your PIA. You have to be careful to not be overwhelmed and to make sure you do not agree to pay more than you can afford. You are not released from your debts till the PIA has been fully complied with.

Bankruptcy

In Australia, voluntary bankruptcy is the most common form of bankruptcy, when an individual decides to declare themselves bankrupt on their own. When a person is unable to repay his or her debts and has no other way to resolve their financial difficulties, this type of bankruptcy is generally recommended. Voluntary bankruptcy allows individuals to have their debts legally written off, providing them with a fresh financial start. It also stops creditors from taking any legal action against the individual and puts an automatic stay on the collection of all outstanding debt payments. This means that while under this type of bankruptcy, any assets owned by the individual cannot be taken away or repossessed by creditors. However, it is important for those considering voluntary bankruptcy to understand that this form of insolvency comes with certain consequences. Firstly, declaring oneself bankrupt will severely affect one’s credit rating while subject to bankruptcy and for the next two years after being discharged from bankruptcy. This can make it difficult for them to secure future loans or credit cards in that time period. During bankruptcy the persons wages are protected and you can save in your bank account without limit from your wages. Your superannuation that you have accrued over the years is protected as is the super your employer pays whilst you are bankrupt. 

We favour bankruptcy because it protects your income and clears your debt immediately. If you should happen to get sick or have an accident – you have the comfort of knowing that your overwhelming debt is gone permanently. With a Debt Agreement and Personal Insolvency Agreement, your debt is not cleared until you have fully complied with the terms of the agreement.

Are You Looking For More Information About The Types Of Bankruptcy?

At Understanding Bankruptcy we recommend that before you make your decision on what you will do, take a step back and realise the pressure you are under. Then before you make a decision you first consider all available options. For more relevant information on your 3 bankruptcies alternatives, we recommend the following article on our website What Alternatives Do I Have?

For information on bankruptcy, we recommend the following articles on our website: What is bankruptcy? How does it work? and, Bankruptcy – What Is It?

For information on Debt Agreements, we recommend the following article on our website Debt Agreements: The Facts. 

We can help you determine the best course of action if you are seeking advice on bankruptcy in Sydney, Melbourne, Brisbane, Perth or anywhere else in Australia. We are here to help you navigate through the 3 types of bankruptcies Australia. If you have any questions about the types of Bankruptcy please give us a call on 1300 794 492 or email hello@understandingbankruptcy.com.au