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What Is the Difference Between Bankruptcy and Debt Agreement?

What Is the Difference Between Bankruptcy and Debt Agreement?

What Is a Debt Agreement?

The Bankruptcy Act allows insolvent individuals and sole traders to enter formal debt agreements with their creditors. A Part IX/9 Debt Agreement is where you negotiate a legally binding agreement between you and your creditors. A Part 9 Debt Agreement is aimed at lower-level deficits often associated with consumer liabilities such as credit cards.

The terms set out in this type of debt agreement can include but are not limited to:

  • The amount agreed to be loaned by the creditor to the recipient.
  • The payment terms
  • The instalment amounts
  • The time period

What Is the Difference Between Bankruptcy and Debt Agreements

Suppose you came to the point where your personal or business debt obligations can no longer be met, and you are insolvent. In that case, you can consider Bankruptcy or Debt Agreements with your creditors.

Let’s explore each option to help you gain a better understanding of what your options could be.

Bankruptcy Defined

In its most simple form, bankruptcy is a legal process set out by the laws of Australia that releases a person or business (sole trader) from almost all their debt obligations. In Australia, bankruptcy is governed by the Bankruptcy Act of 1966 with subsequent amendments as gazetted by parliament. The Australian Financial Security Authority (AFSA) is the Government body overseeing all activity under the Bankruptcy Act.

Types of Bankruptcy:


Suppose a person or business concludes that they are not financially able to service their credit obligations, they can declare themselves insolvent.  This is a process whereby you apply to be declared bankrupt, and an appointed trustee will govern the process.


A creditor can petition to have you declared bankrupt if you fail to keep to the terms of that agreement. The amount owing to them must be more than $10,000, and the petition needs to be presented to the Federal Court of Australia.

Bankruptcy is a legally dictated and governed process that makes it explicit as to which steps need to be taken, when and which decisions are to be taken at the sole discretion of the appointed trustee.

The trustee will evaluate your liquidity and try to sell as much of your assets. The proceeds from all sales will then be distributed to all your creditors. The aim is to return as much as possible to your creditors; however (by definition of being insolvent), in most cases, this means that creditors are not guaranteed full payment. The unpaid amounts still owing, not creditors, are wiped upon your discharge from bankruptcy, and you can start new life debt free.

Debt Agreements as a Possible Alternative To Bankruptcy

A Part IX/9 Debt Agreement is between a delinquent debtor and its creditors.  Instead of a Trustee selling your assets, you offer a repayment plan over a period (maximum of three years). It is unlikely that creditors will be repaid in total during this period. At the end of the repayment period, your debts are wiped, and the creditor can not pursue you for the unpaid portion of the debt.

The benefit is that the creditor will know precisely how much of their debt they receive their money back, albeit at a lower return. However, when entering into a Debt Agreement, you must be able to make the required payments over the period stated because failure to comply will result in all money paid being forfeited, and you are then having to file for bankruptcy – and commence a new three-year term.

It should be noted that a Debt Agreement will identically appear on your credit rating to what would occur if you went bankrupt.

“One of the tough choices you need to consider when getting rid of debt is whether to declare bankruptcy or enter a debt agreement. We can help you understand your options and answer questions regarding Part 9 Debt Agreements, employment restrictions and how a debt agreement affects renting. We are here to help and ensure you have all the information to make an informed choice for the best outcome.”

If you are seeking Bankruptcy advice in Sydney, Melbourne, Brisbane, Perth or anywhere around Australia. We can help you make informed choices before selecting your best options. Get a complimentary first consultation by calling 1300 887 210. We can help you with questions about the difference between Bankruptcy and a Debt Agreement so you know which is the best option for you.




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