What are the 3 Types of Bankruptcies in Australia?
When you’re dealing with unmanageable debt and can’t pay everything off, understanding your legal options can feel overwhelming. The term “bankruptcy” is often used broadly, but in Australia there are actually three distinct types of bankruptcies available under the Bankruptcy Act 1966 that help people manage serious financial difficulty.
Each of the 3 types of bankruptcies in Australia serves different situations and comes with its own procedures, timeframes and consequences. Knowing which option applies to your circumstances is the first step toward regaining control of your financial position.
If you’re facing debt you’re unable to repay, get in touch with us at Macmillan Lawyers and Advisors for obligation-free legal advice tailored to your situation. Our experienced bankruptcy lawyer can help you understand which of the three bankruptcy types best suits your circumstances and guide you through the process.
What are The 3 Types Of Bankruptcies in Australia?
The 3 types of bankruptcies in Australia are personal insolvency, debt agreement and bankruptcy.
1. Personal Insolvency
A Personal Insolvency Agreement (PIA, also called a Part X agreement) is a flexible formal option for people dealing with higher debt levels, significant assets or income that exceeds the thresholds for a Part IX debt agreement.
Unlike full bankruptcy, a personal insolvency agreement lets you propose a settlement to your creditors without going through the complete bankruptcy process. You might offer them a lump sum payment, regular instalments over time or a combination of both (depending on what you can manage) to clear your unsecured debts.
A registered trustee manages the entire process, helping you prepare a proposal that’s realistic based on your financial circumstances. This trustee presents your offer to creditors and will oversee the agreement if it’s accepted.
Who is it For?
A personal insolvency agreement may be an option available if you:
- Are insolvent and can’t meet your debt obligations as they fall due
- Live in Australia, or have a business or property located here
- Haven’t already proposed a PIA within the last 6 months
- Have complex finances that don’t fit the limits of other formal options
There are no minimum or maximum income or debt thresholds for a personal insolvency agreement, making it suitable for higher earners or those with substantial assets who need a structured way to settle with creditors without becoming bankrupt.
How the Process Works
First, you appoint a controlling trustee. This trustee temporarily takes control of your financial affairs to review your situation and help you draft a realistic proposal for your creditors.
Your creditors have to vote on whether or not to accept the proposal you present. Approval requires a special resolution of at least 75% by value of debts and 50% or more by number of creditors must vote in favour.
If accepted, the agreement becomes binding on all unsecured creditors, even those who voted against it. Unlike bankruptcy, which lasts 3 years and 1 day, a personal insolvency agreement has no fixed end date. It continues until you’ve fulfilled the agreed terms, which could be shorter or longer depending on what you’ve negotiated with your creditors to pay.
2. Debt Agreement (also called Part IX Debt Agreement)
A Part 9 debt agreement is a formal arrangement designed to help you settle your debts without needing to declare bankruptcy. It’s one of the most common types of bankruptcy alternatives in Australia and is designed for people with lower to moderate debt levels who have a regular income.
Under a debt agreement, you make affordable payments over a set period, and once you’ve completed the agreement, your remaining debt is written off. A debt agreement is a formal option that’s legally binding, meaning creditors must stop all recovery action, including contact from debt collectors and court proceedings.
This option available under the Bankruptcy Act can help you avoid the serious consequences of full bankruptcy while still dealing with unmanageable debt in a structured way.
Who Can Use it?
To be eligible for a Part IX debt agreement, you must meet specific financial thresholds set by the Australian Financial Security Authority (AFSA). These indexed amounts are updated regularly to reflect changes in the economy.
You may qualify if you:
- Are insolvent and unable to repay your debts as they fall due
- Haven’t been bankrupt or entered into a debt agreement or personal insolvency agreement in the last 10 years
- Have total unsecured debts under $148,129.80
- Earn less than $111,097.35 per year after tax
- Own assets worth less than $296,259.60 in total
If you exceed any of these limits, a debt agreement won’t be suitable, but a personal insolvency agreement or voluntary bankruptcy may still be options for dealing with unmanageable debt.
How Long does it Last?
Most debt agreements run for up to 3 years, although the exact length depends on your income, the amount you owe and what you can realistically afford to pay.
The agreement can be extended to up to 5 years. This longer timeframe can make repayments more manageable while protecting your property from being sold.
Once you’ve completed all the agreed payments, any remaining covered debt is written off, and you’re released from the agreement. Unlike bankruptcy, a debt agreement doesn’t automatically appear on the National Personal Insolvency Index for life. It’s removed 2 years after completion or 5 years from the start date, whichever comes first.
3. Bankruptcy
Bankruptcy is a legal process for people who are insolvent and have no realistic way to pay their debts. It’s the most serious of the 3 types of bankruptcies in Australia, and should only be considered after you’ve explored all other formal options and alternatives to bankruptcy.
When you apply for bankruptcy, or you’re made bankrupt by a creditor through court proceedings, a registered trustee is appointed to manage your bankruptcy and take control of your bankrupt estate. The bankruptcy trustee sells your non-protected assets to repay creditors what they’re owed. This personal bankruptcy process differs from company liquidation, which applies to businesses rather than individuals.
Bankruptcy is a legal pathway to clear most unsecured debts, but it comes with long-term consequences, including restrictions on travel, employment, and your credit record, as well as being permanently named on the National Personal Insolvency Index.
If you’re considering bankruptcy, it’s important to speak to a financial counsellor or get legal advice first. The National Debt Helpline on 1800 007 007 offers free help from a free financial counsellor, or you can contact us at Macmillan Lawyers and Advisors for professional advice about whether bankruptcy would be the right option for your situation.
Who Can Apply?
Anyone who is insolvent can apply for bankruptcy. You can enter voluntary bankruptcy by completing a bankruptcy form called a Debtor’s Petition and lodging it with the Australian Financial Security Authority (AFSA). This is the most common way people become bankrupt.
Alternatively, you may be made bankrupt involuntarily if a creditor applies to the court to make you bankrupt after you’ve been served with a bankruptcy notice and haven’t responded or paid the debt within the required timeframe. This debt recovery action by creditors results in the court issuing a sequestration order, which forces you into bankruptcy.
How Long does it Last?
Bankruptcy lasts 3 years and 1 day from the day your bankruptcy form gets accepted. This is the standard bankruptcy period for first-time cases, although it can be extended to 8 years for things like failing to cooperate or providing false information.
During this time, you must report any changes to your income to your bankruptcy trustee. If you earn above a certain threshold (set by indexed amounts), you’ll be required to make compulsory payments from your income to your trustee to manage your bankruptcy and repay creditors.
After discharge, most of the debts covered by bankruptcy end up being wiped out. However, some debts aren’t covered by bankruptcy and remain payable, including child support, court fines, HECS/HELP loans and any debts incurred through fraud.
Comparison of the 3 Types of Bankruptcies Australia
Learning the differences and nuances between the 3 types of bankruptcies in Australia isn’t just for general knowledge. It can help you choose the right path for your financial situation. Each option has different eligibility requirements, costs, timeframes and consequences.
| Feature | Personal Insolvency Agreement (PIA) | Part 9 Debt Agreement | Bankruptcy |
|---|---|---|---|
| Eligibility Requirements | No income, debt or asset limits. Must not have proposed a PIA within the previous 6 months. | Debts < $144,235, after-tax income < $108,176.25, assets < $288,470. No bankruptcy or debt agreements in the last 10 years. | No debt, income or asset limits. May be rejected if you’ve been bankrupt multiple times recently. |
| Duration | No fixed timeframe, lasts until you’ve met the agreed terms. | Usually 3 years, extendable to 5 years if you own a home. | 3 years and 1 day (standard). Can be extended to 5/8 years on various grounds. |
| Asset Protection | You may keep some assets depending on what creditors agree to in your proposal. | You usually keep your assets, including your home and car, as long as you make your agreed payments. | Non-protected assets are sold by your trustee. You keep basic household items, tools of trade (up to a value), and one modest vehicle in most cases. |
| Impact on Credit File | Stays on your credit report for 5 years. Also listed on the National Personal Insolvency Index. | Stay on your credit report for 5 years. Removed from the National Personal Insolvency Index 2 years after completion or 5 years from start, whichever is first. | Remains on your credit report for 5 years from the date of bankruptcy or 2 years from discharge (whichever is longer). Your name will always be on the National Personal Insolvency Index. |
| Travel Restrictions | You may need permission from your controlling trustee to travel overseas, depending on the terms of your agreement. | No automatic travel restrictions, though some agreements may include conditions. | Need to express written permission from the trustee before travelling overseas. Travelling without permission may extend your bankruptcy period. |
| Creditor Approval Required | Yes, creditors must vote to accept your proposal. Requires 75% by value and 50% by number to approve. | Yes, creditors vote on your proposal. A majority by value must accept it. | No creditor approval needed if you apply for voluntary bankruptcy. If a creditor applies to the court to make you bankrupt, the court decides. |
| Cost | Fees vary depending on complexity. Trustee fees and costs are deducted from your estate or included in your proposal to creditors. | Administrator fees are included in your regular payments, around 20 to 30% of the total amount you pay over the agreement period. | No upfront cost to apply for bankruptcy. Trustee fees and administration costs are deducted from your income contributions or asset sales. |
Which Type of Bankruptcy is Right for You?
Choosing between the types of bankruptcies in Australia depends on your individual financial position, the amount you owe, your income level and what assets you own. There’s no one-size-fits-all answer, and what works for one person may not be suitable for another.
Consider Your Financial Position
Start by taking an honest look at your current situation:
- How much debt do you have? If your unsecured debts are under the indexed amounts for a debt agreement ($148,129.80), a Part IX debt agreement might be suitable. Higher debts may require a personal insolvency agreement or bankruptcy.
- What’s your income? If you earn under $108,176.25 after tax, you may qualify for a debt agreement. Higher earners might need to consider a personal insolvency agreement instead.
- What assets do you own? If you own a home or significant assets worth more than $296,259.60, a debt agreement won’t be viable. A personal insolvency agreement may let you keep assets if creditors agree, while bankruptcy may require selling non-protected assets.
- Can you afford regular payments? Both debt agreements and personal insolvency agreements require you to make ongoing payments. If you have no income or assets to contribute, bankruptcy may be the only realistic option available.
Seek Professional Help
The bankruptcy process and other formal options are complex legal processes. Making the wrong choice can have lasting financial and personal impacts, so it’s important to get help before you decide.
You can:
- Speak to a financial counsellor for free, confidential advice. The National Debt Helpline (1800 007 007) offers free financial counselling to help you figure out how best to handle your situation.
- Get legal advice from experienced insolvency lawyers. Professional advice tailored to your circumstances can help you understand the bankruptcy may affect your situation and what alternatives to bankruptcy might work better.
- Contact AFSA (the Australian Financial Security Authority) for general information about bankruptcy in Australia, how to apply for bankruptcy and what happens during the bankruptcy period.
This article provides general information only and is not a substitute for legal advice. If you’re dealing with unmanageable debt and considering a debt agreement, personal insolvency agreement or bankruptcy, contact us at Macmillan Lawyers and Advisors for specific, professional advice on your situation. We can also assist with business insolvency matters and guide you through the liquidation process if required.
3 Types of Bankruptcies Australia FAQs
Will I lose my house or my car?
It depends on which option you choose and what equity you have.
In bankruptcy, homes with equity might end up being sold. You can usually keep one car up to around $9,600 in value (indexed amounts apply). Anything worth more may need to be sold, with the difference going to creditors.
With a debt agreement, you can keep your assets, but this may be revised if you miss a payment. With a personal insolvency agreement, it depends on what creditors agree to. You may keep your home and car if your proposal focuses on income payments rather than asset sales.
Can I still work when I’m bankrupt?
Yes, you can work in most jobs during the bankruptcy period. However, you can’t be a company director or manage a corporation. Some licensed professions (lawyers, accountants, financial advisers, real estate agents, etc.) require you to disclose your bankruptcy, and certain government positions may be restricted.
Debt agreements and personal insolvency agreements generally have no employment restrictions.
Can creditors still contact me after I enter bankruptcy or a debt agreement?
No, once you become bankrupt or enter a Part 9 debt agreement, creditors are required to stop contacting you. All communication goes through your bankruptcy trustee or administrator.
Creditors with secured debts (like mortgage lenders) may still contact you about those specific debts. If any creditor continues to contact you after you’ve been made bankrupt or entered a formal agreement, inform your trustee immediately.
Back to Top: What are the 3 Types of Bankruptcies in Australia?
