Here at Debt Free Australia we frequently receive questions from people who are struggling with their debts and want to explore if there are any alternatives to formal bankruptcy. In this article we explore the differences between a Debt Agreement and Bankruptcy. Hopefully we will clearly explain how a Debt Agreement is a genuine alternative to bankruptcy.
How is a Debt Agreement an alternative to Bankruptcy?
Simply put, a Debt Agreement is an alternative way to deal with your unsecured debts. Like Bankruptcy, a Debt Agreement is governed by the same Federal legislation (the Bankruptcy Act 1966), however it brings less severe consequences compared to a full blown bankruptcy.
So what are the consequences of a Debt Agreement?
Simply put the consequences can be summarised as follows:
- Proposing a Debt Agreement is an Act of Bankruptcy;
- Will be recorded on your credit file for a minimum of 5 years (unless if the agreement runs longer than 5 years).
Why is proposing a Debt Agreement an Act of Bankruptcy?
An Act of Bankruptcy is not to be confused with a full blown Bankruptcy. It simply means that if you fail to comply with the terms of your Debt Agreement, or if your creditors fail to accept your proposal, they can then rely on that “event” to petition to the court to make you bankrupt. But remember, you cannot be made bankrupt without a court order. i In other words, if you commit an act of bankruptcy, you do not automatically become bankrupt.
If you are looking for financial relief (i.e. as most do not repay 100% of the debt through a Debt Agreement) the Government legislators felt that there must be consequences of proposing and entering into a Debt Agreement. AFSA has prepared an information sheet on the consequences of entering into a Debt Agreement.
How will my credit rating be affected under a Debt Agreement?
A Debt Agreement will be recorded on your credit file for a minimum of 5 years (unless if the agreement runs longer than 5 years). It will also be recorded on the National Personal Insolvency Index (NPII) for life which is a public record.
If you attempt to obtain a loan during this time, lenders will know that you have previously entered into a Debt Agreement. That being said, a Debt Agreement will most likely be viewed more favourably than Bankruptcy, as it shows that you attempted to repay as much as you could despite the fact that you were insolvent.
What benefits will I enjoy in a Debt Agreement compared to Bankruptcy?
- No Travel Restrictions – In Bankruptcy you must request permission to travel overseas and often you will need to show where the monies to fund your trip has come from. Compared to a Debt Agreement, there is no restriction at all under a Debt Agreement.
- No Yearly assessment of income & compulsory contributions – In Bankruptcy, your trustee will need to conduct an annual assessment of your income to see if you have become liable for compulsory income contributions. There is no such requirement under a Debt Agreement, so if you get a higher paid job after entering into your debt agreement, you will be able to save more money!
- No automatic loss of assets – When you declare Bankruptcy, your trustee will make an assessment as to what assets you can keep and what assets you will need to surrender. Furthermore, whilst you are bankrupt, you cannot purchase any asset. In a Debt Agreement, you get to keep all of your assets.
Should I propose a Debt Agreement or Bankruptcy?
Ultimately, the best course of action will depend on your specific circumstances and for that reason we offer a free debt assessment. You may commence this assessment by providing some basic details on-line. For a full assessment call the team at Debt Free Australia. Our staff are fully trained and can advise you on your best options.
Call us today on 1800 676 598. We offer a 24 hour / 7 days a week advice line.