All across Australia, there are many people who have to turn to bankruptcy as the last resort to their financial problems.  People with high debts often think that becoming bankrupt is the only solution to their problems. But being declared bankrupt has serious and life-long consequences and should be treated as a last resort only.

What are the consequences of being declared bankrupt?

The consequences of being declared bankrupt seriously outweigh any perceived benefits such as being ostensibly debt-free.  Whilst the consequences of bankruptcy vary from one individual to another, it's likely that if you are declared bankrupt you will have to liquidate some or all of your assets, including property and cars.

People who are declared bankrupt are also unable to apply for certain jobs especially when they are un-discharged bankrupts. It's very difficult, for example, to work as a company director and obtain a position in the financial services sector if you are declared bankrupt.

Being bankrupt also curtails your ability to travel outside Australia. It's also very difficult to obtain credit or finance once you have been declared bankrupt for at least 7 years after being bankrupt, and possibly for the rest of your life. 

What are the alternatives to bankruptcy?

Before going down the road to bankruptcy people should fully explore the alternative options available to them.  Even with high debts, there are many alternatives to being declared bankrupt.

Depending on the size of the debt, it's possible to enter into formal or informal arrangements with creditors to work out a payment plan to repay the debt over a period of time.

Depending on individual circumstances, it's also possible to consolidate all debts into one loan. This will usually mean paying a lower interest rate than the interest rate being charged on each individual loan, which should also ease debt burden.

Many financial institutions offer some temporary breathings space under their hardship provisions so it is worth contacting the financial institution to see what their rules are.

Anyone who is struggling to pay off their debts should also talk to a financial counsellor about how best to manage their ongoing financial liabilities.  There are financial planners available who charge for their services as well not-for-profit financial counselling groups. 

Below, is some information that explains about the terms  insolvency and bankruptcy: 

What is Insolvency? 

Insolvency is the inability of a person - an individual or a corporation - to pay all their debts as and when they fall due.  In Australia, insolvency of an individual is formally dealt with under the Bankruptcy Act. The insolvency of companies is dealt with under the Corporations Act. 

What is Bankruptcy? 

Bankruptcy is a form of legal protection that financially shields a debtor (you) from actions by a creditor. Debtors can opt to resolve their financial difficulty in this manner or creditors may force bankruptcy on a debtor to prevent financial operation. 

Bankruptcy means that the debtor does not need to meet their repayment obligations, but this status also prevents them from borrowing money for many years. It also remains on record with credit-reporting agencies, such as Baycorp for seven years, which limits future applications for credit. During the time of bankruptcy, the bankrupt cannot serve as director of a company. Courts will also monitor their income, restricting a bankrupt's standard of living.

Bankruptcy - General Alternatives to Bankruptcy

Avoiding bankruptcy can be achieved in the following ways: 

• Seek the assistance of a Professional Organisation to assist you with a Debt Agreement.  The Debt Agreement was designed to be a compromise between creditors and debtors (your creditors and you). If you file for bankruptcy you both loose.  Debt agreements are interest free; require only one regular affordable repayment; and stop debt collectors from hassling you. 
• Arrangements under Part X of the Bankruptcy Act avoiding bankruptcy. A person who is insolvent may avoid bankruptcy by reaching an understanding with creditors for the satisfaction of their claims. This can be done by way of a personal insolvency agreement under Part X of the Bankruptcy Act.   Part X is an alternative to going bankrupt voluntarily by lodging your own debtor's petition with ITSA.  Do not leave it too late.   Under some circumstances it may be too late to implement a Part X agreement to avoid bankruptcy. 

If you are employed and receive a regular income, creditors have the opportunity to seek a legal order to garnish your income, which involves the automatic deduction of repayments from your earnings. The court will decide if this is a fair way for the creditor to recover a debt based on your other financial commitments.  There is a scale allocated in each State for the maximum you can earn before the court can garnish your income. 

Informal Arrangements

An informal arrangement is an agreement between the debtor (you) and their creditors and is often entered into if the debtor would not benefit from bankruptcy. An example of the type of agreements that can be made are:

• a suspension of debt repayments for an agreed period; or
• an agreement that the debtor repay their debts by installments over a period of time.

It is better for creditors to reach a compromise with the debtor about business debts. This allows them to avoid becoming bankrupt.   This type of arrangement is not legally binding on the debtor or their creditors. If the creditors change their minds or the debtor cannot keep up the repayments, the creditors are entitled to pursue repayment of the debt, or debts, in the normal manner.

Formal Agreements

Formal alternatives to bankruptcy are found under Parts IX and X of the Bankruptcy Act 1966 (Cth), are binding on both the debtor and their creditors and are administered by a registered trustee, a debt agreement administrator or the Insolvency and Trustee Service of Australia (ITSA). Part IX debt agreements are by far the most common type of formal agreements used.

Part IX Debt Agreements are a low cost flexible alternative to bankruptcy, and are binding because they are made by a majority of creditors at a creditor's meeting.  However, no agreement filed as an alternative to bankruptcy will exempt the debtor from any liability under a maintenance order or agreement. Debt agreements are not as restrictive as bankruptcy, as the debtor is not considered to be bankrupt.

Part X Personal Insolvency Agreements under the Act can be expensive. A registered trustee will require a debtor to pay in the vicinity of around $2000 up front to cover their initial costs and expenses. When a debtor authorises a trustee, accountant or solicitor to organise a debt agreement under Part IX or a personal insolvency agreement under Part X of the Act, it gives the debtor the same protection as bankruptcy in relation to action by creditors.