Importance of Considering Alternatives
While bankruptcy can provide significant relief from overwhelming debt, it is a serious step with "major long-term effects on your financial future".
Therefore, it is important for individuals to explore all available formal and informal options for managing debt before deciding to declare bankruptcy.
Declaration of Intention (DOI)
A Declaration of Intention (DOI) is a formal step that, if certain conditions are met, provides 21 days of protection from unsecured creditors.
During this period, unsecured creditors are legally prohibited from taking further action to recover their debts.
This temporary protection offers crucial time for the individual to consider their debt management options without immediate pressure from creditors, potentially helping them to avoid bankruptcy altogether.
The DOI acts as a temporary legal "breathing space" or "cooling-off period."
This mechanism is particularly valuable for individuals under immense debt pressure, allowing them to pause, obtain professional advice, and evaluate their long-term financial strategy without the immediate threat of escalating creditor action. It represents a proactive measure within the legal framework designed to prevent hasty or ill-informed decisions that could lead to full bankruptcy.
Debt Agreements (Part IX)
A debt agreement, also known as a Part IX (9) debt agreement, is a legally binding arrangement between a debtor and their creditors to settle most unsecured debts.
It often involves paying a lump sum or instalments that may be less than the total amount originally owed.
This option offers a flexible way to reach an arrangement to settle debts without the need to declare full bankruptcy.
It is typically designed for individuals on a lower income who cannot pay what they owe but wish to avoid bankruptcy.
To be eligible, the debtor's income, assets, and debt must be below certain indexed limits set by AFSA.
The proposal must be accepted by the majority of creditors (by value).
Additionally, the debtor must not have been bankrupt, had a debt agreement, or a personal insolvency agreement in the last 10 years.
A debt agreement can last for up to three years, or up to five years if the debtor owns their home or is buying the home they live in.
Consequences of a debt agreement include:
Public Record: A debt agreement will be listed on the National Personal Insolvency Index (NPII) and on the individual's credit report for at least five years.[10, 11] This can significantly affect the ability to obtain new credit, telecommunications services, or rental properties.
"Act of Bankruptcy": Proposing a debt agreement is considered an 'act of bankruptcy'. If the proposal is not accepted by creditors, or if the agreement is terminated due to non-completion, creditors can use this 'act of bankruptcy' to apply to the court to make the individual bankrupt.
Fees: Debt agreements can involve significant upfront and ongoing administrator fees, which are included in the proposal. These fees are often non-refundable if the agreement does not proceed.
Secured Debts: Debt agreements do not cover secured loans (e.g., home mortgages, car loans), which must continue to be paid separately.
Despite these consequences, debt agreements offer benefits.
* Individuals are generally not forced to sell assets to pay debts.
* Creditors agree to stop charging interest and accept a lower amount than owed.
* Debt collection activities cease once the agreement is accepted.
Debt agreements represent a formal middle ground, offering debt relief and asset protection without the full severity of bankruptcy, particularly appealing to those with assets they wish to retain.
Personal Insolvency Agreements (PIA)
A Personal Insolvency Agreement (PIA) is another legally binding and flexible arrangement between a debtor and their creditors to pay off debts in a way tailored to the individual's financial situation.
A key distinction from debt agreements is that PIAs do not have statutory limits on the amount of debt, income, or assets an individual can have.
This makes PIAs a suitable option for individuals with higher debt levels, more complex financial structures, or significant assets they wish to protect.
While offering greater flexibility, there is a chance that an individual might end up paying more by signing a PIA than by declaring bankruptcy.
Similar to bankruptcy, an individual cannot be a company director while subject to a PIA.
The absence of debt, income, or asset limits for PIAs positions them as a more sophisticated and potentially more costly alternative for individuals with greater financial complexity or higher net worth who seek to avoid bankruptcy while retaining control over their assets. The explicit warning about potentially paying more indicates that this flexibility and asset protection often come at a higher financial cost, necessitating expert negotiation and a clear understanding of the long-term financial implications.