When it comes to a Debt Agreement vs Bankruptcy, which debt relief solution is best?
IF you have been struggling with your debt of late, you may have heard of a Debt Agreement. A Part 9 Debt Agreement is a legally binding agreement between you and your creditors which outlines a new, affordable repayment arrangement. It freezes your fees and interest and allows you to repay only a percentage of each dollar you owe to satisfy your debts.
The jury is still out on whether or not a Debt Agreement is better than Bankruptcy. The truth is, each case of debt is different. While it might be more beneficial for some people to declare bankruptcy, it has a number of restrictions and long term consequences which make it a very difficult option for others to pursue.
The battle of a Debt Agreement vs Bankruptcy is entirely dependent on your situation. For example, if you own a home, you might prefer to enter a Debt Agreement to keep your house. But if your debts are beyond control and you have lost a steady source of income, Bankruptcy would be better.
To help you make an informed decision about which debt relief solution is right for you we have touched on some of the important differences between the two. We compare bankruptcy with Part 9 Debt Agreements in the ultimate battle of debt relief solutions:
Debt Agreement vs Bankruptcy: Amount of Debt
Bankruptcy – There is no restriction on the amount of debt you owe to declare bankruptcy. You could owe $2000 or $200,000. This is because the act of declaring bankruptcy is officially declaring to your creditors that you don’t have any money or value in assets to cover the debt you owe. So a Trustee will sell your assets and cap your wages for the period of Bankruptcy to repay your creditors what you owe.
Part 9 Debt Agreement – Only unsecured debts may be included in a Debt Agreement. The combined value of these debts cannot exceed the threshold amount set by the Australian Financial Security Authority. You can check the threshold amount here – it is updated twice annually.
Debt Agreement vs Bankruptcy: Earning Capacity
Bankruptcy – During the bankruptcy you can not earn over threshold amount set by AFSA. Any money earned over this amount will be confiscated by your trustee and distributed to your creditors.
Part 9 Debt Agreement – There are no restrictions on how much money you can earn. However you need to be earning enough to cover your Debt Agreement repayments. Often this means people who have no income can not enter into a Debt Agreement.
Debt Agreement vs Bankruptcy: Operating a Business
Bankruptcy – There are several restrictions on operating a business when bankrupt. These depend on which industry you are in. While bankrupt, you cannot be a director of a company or be involved in its management. You may be able to operate a business while bankrupt. However in some professions you must disclose you declared bankruptcy.
Part 9 Debt Agreement – You may be able to operate a business while you are in a Debt Agreement. In some industries you will still need to disclose your state of insolvency.
Debt Agreement vs Bankruptcy: Owning Property
Bankruptcy – You can not own property while you are bankrupt. Any property or share in a property you own will be sold by your trustee. The proceeds from the sale will go to your creditors.
Part 9 Debt Agreement – You may own property while you are in a Part 9 Debt Agreement. However if you are planning to purchase a new property while you are in a Debt Agreement, you may find it difficult to secure finance.
Debt Agreement vs Bankruptcy: Owning a car
Bankruptcy – There is a set threshold on the value of the car you drive. If your vehicle exceeds this amount it will be sold by your trustee. It might also be repossessed if it was secured against a loan.
Part 9 Debt Agreement – There are no restrictions on the number or value of vehicles you can own during a Debt Agreement. Secured loans can not be included in a Debt Agreement. If you have purchased your car with a secured car loan, you will need to maintain the minimum repayments on that loan separately to your Debt Agreement repayments.
Debt Agreement vs Bankruptcy: Length of Insolvency
Bankruptcy – You are bankrupt for three years. This term can be extended to 5-7 years by your creditors or trustee under certain circumstances. Once your bankruptcy is over, it will remain on your credit file as a ‘discharged bankrupt’ for another 2 years. While your Bankruptcy is officially over after 3 years (if not extended) you will find it difficult to borrow money in the following 2 years as it will still be marked on your credit file.
When you declare Bankruptcy, your name will be listed on the National Personal Insolvency Index for life.
Part 9 Debt Agreement – A Debt Agreement is usually negotiated over a 5 year period. You can pay it off sooner without consequence. In certain circumstances, a Debt Agreement may also be renegotiated part way through if your situation changes. This will essentially extend the life of your agreement.
When you enter a Part 9 Debt Agreement your name will be listed on the National Personal Insolvency Index while you are in the agreement only.
Debt Agreement vs Bankruptcy: Your Credit File
Bankruptcy – Your bankruptcy will appear on your credit file for 5 years – 3 years as a Bankrupt and 2 years as a discharged Bankrupt. Declaring bankruptcy absolves all your debt and the restrictions placed on you discourage you from being able to borrow any money. At the end on 5 years, even if your bankruptcy drops off your credit report, you won’t have any repayment history to speak of. This lack of information on your credit file can result in a low credit score which may take some time to rebuild.
Part 9 Debt Agreement – A Part 9 Debt Agreement will typically remain on your credit file for 5 years. As only unsecured debts may be included in a Debt Agreement, you need to maintain your secured debt payments outside the Debt Agreement payment. If you keep up with the minimum repayments for secured loans by paying in full and on time, you can maintain a consistent credit score. Once your Debt Agreement drops off your file, your credit score can improve in a matter of days.
Which is best for you?
In the debate of Debt Agreement vs Bankruptcy, a Debt Agreement is a less intrusive method of repaying your debts. While it still requires you to make debt repayments, they are made affordable and your financial future will recover quickly once it has ended. Bankruptcy has many long term, restrictive consequences which are hard to escape years after the bankruptcy has finished. However both debt relief solutions have their place in Australia and are tried and proven methods of helping you rid yourself of bad debt.
If you aren’t sure which is the best debt relief method for you, call Debt Rescue for an obligation FREE chat. Our Case Manager will take the time to get to know you and your debt situation before recommending a personalised solution to your debt. You can call us on 1800 00 3328 or fill in the contact form on the side of this page and we’ll call you back!