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Debt Agreement vs Bankruptcy

If you’re debts have just become too much to handle, and you feel that bankruptcy may be an appealing option, you should first consider a Debt Agreement. Debt Agreements are a flexible and financially beneficial alternative to bankruptcy. Both the Part 9 Debt Agreement and Bankruptcy are regulated by the Bankruptcy Act and administered by ITSA and are designed for people who are struggling to meet the demands their debts place on them and are therefore insolvent.

If you are insolvent but do not wish to go down the bankruptcy route, you will find that a debt agreement is cheaper and less restrictive than the bankruptcy option.

Once in a Debt agreement you will attempt to negotiate to reach an agreement with creditors and hopefully settle the outstanding debt. You will propose a payment plan offering the creditors a monthly payment that you can afford to pay them. This may well involve the creditors receiving less than the amount owed to them in full settlement of the debt, however in doing this they ensure some form of repayment. You agree to pay off some or most of the debt voluntarily in line with what you agree with the creditors under the debt agreement.

When you declare bankruptcy, if you have no money and no assets of value that can be sold to cover your debts, then you can simply walk away from all outstanding debts. Declaring bankruptcy is very serious and is not a decision to be taken lightly. The bankruptcy tends to stand over a three year period from the date a statement of affairs is followed. A bankruptcy can last up to eight years in some cases, if there is a lack of cooperation or documents are not provided appropriately.

If you do decide to declare bankruptcy, some of your assets, or even all of your assets may be repossessed by the bankruptcy trustee and sold to repay your debts to your creditors. Bankruptcy can be, and generally is voluntary. However it is sometimes the result of forcible action taken by your creditors who seek to claim the monies owed by forcible bankruptcy, this will result in the seizing and selling of assets as a means to the creditors getting their money back.

Bankruptcy takes away a lot of your freedoms in a way that a debt agreement does not. Some of the freedoms that are affected include your asset ownership, you will likely be stripped of your assets if declared bankrupt, so as to pay your creditors. Your employment prospects will drop, unfortunately bankruptcy is like a black stain on any personal or financial record. Employers view bankruptcy as a negative and may decide not to employ you on this basis. Your ability to rent property will be effected. All lettings companies will complete a full credit check and recent bankruptcy will cause an automatic fail on any credit check. Landlord references will also be required. If you had any previous outstanding or unpaid rental payments then this would seriously damage your chances of being able to rent a property. Your being able to travel outside of the country may also be effected.

 Consequences of Entering into a Debt Agreement

Bankruptcy is something you definitely want to avoid, not least because it’s such a permanent stain on your credit report. However a debt agreement is an indication of your insolvency and will be recorded as such on the (National Personal Insolvency Index) NPII. This is also a black mark on your credit report.

Your Credit Report will reflect this for five years making it difficult to borrow from any creditors, whether it be a mortgage, car finance or even just a mobile phone contract. If you have been declared bankrupt within the last five years you will fail all credit checks, which are required for almost any finance.

Your repayments will be affordable and catered to what you are able to pay back each month. This will be one payment which will be split amongst your creditors in relation to the percentage of the entire debt they hold.

Any interest charges frozen will be frozen on the account, helping to stop the debts spiralling out of control and allow you to get on top of the debt.

Creditors are obliged to leave you alone and accept agreed payments providing you uphold the agreement and meet the specified payments.

You will become debt free at the end of the debt agreement period.

 

Role of ITSA with respect to Debt Agreements

ITSA is the Insolvency Trustee of Australia. ITSA is the government agency responsible for the administration and regulation of the personal insolvency system in Australia including Debt Agreements and Bankruptcy.

The Insolvency and Trustee Service Australia (ITSA) also maintains the National Personal Insolvency Index (NPII), a database containing information on past and present insolvencies, debt agreements and bankruptcies.

The Insolvency and Trustee Service Australia (ITSA), are responsible for:

  • The sourcing of information about debt and insolvency across Australia.
  • Maintaining the registry services for the lodgement of all forms relating to personal insolvency, debt agreements and bankruptcy.
  • The regulation of insolvency practitioners and ensuring that they operate within legislative provisions.
  • To act as a trustee for the administration of insolvent estates and other trustee administrations, this includes repossessed properties and assets as well as any proceeds that occur as the result of Crime matters.