2. Australian Personal Insolvency Law Today

Today, the Australian personal insolvency system offers three options to individuals in severe financial hardship. The first and most well-recognised is bankruptcy. Bankruptcies currently make up around 57% of total personal insolvencies.^[1] The term ‘bankruptcy’ can conjure strong emotions, including embarrassment and fear.^[2] Declaring bankruptcy can have significant consequences for individuals: in the short term, it disqualifies them from certain occupations and prohibits them from borrowing large amounts.^[3] In the longer term, bankruptcy can also restrict individuals’ access to credit, or mean that they must pay higher interest rates to obtain credit.^[4] Yet many of those who go bankrupt find the process to be far less stressful than they expect. They report that declaring bankruptcy offers immediate benefits to health and wellbeing, by bringing an end to distressing debt collection activity.^[5] At the end of the bankruptcy period (usually three years and one day), most people receive an automatic discharge, meaning that they are released from their debts. Most Australians who enter bankruptcy do so voluntarily, by lodging an application with the regulator, AFSA. There is no fee to enter bankruptcy and individuals do not need to pay a representative, such as a lawyer or accountant, to act on their behalf.^[6]

The second most common form of personal insolvency is a debt agreement, a formal agreement under Part IX of the Bankruptcy Act.^[7] Debt agreements currently account for around 42% of personal insolvencies each year.^[8] Introduced in 1996, these agreements allow individuals to avoid formal bankruptcy by reaching a compromise with their creditors. The compromise involves agreeing to pay back a certain, fixed proportion of the total debt (eg 50 cents per dollar owed), in regular instalments, over a period of three to five years. At the end of the agreement, if all stipulated payments have been made, the remaining debts are discharged. Debt agreements don’t offer the instant relief that can be obtained by declaring bankruptcy. They can place significant, ongoing financial pressure on those who enter into them. They are not universally available: to access them, an individual’s unsecured debts, property and after-tax income must fall below certain indexed thresholds (currently $148,129.80, $296,259.60 and $111,097.35, respectively).^[9] Even so, debt agreements can be helpful to people with assets to protect, such as a family home.^[10] This is because they offer a way to retain these assets, instead of relinquishing them to a trustee, for potential distribution among creditors. Debt agreements are initiated by lodging paperwork with AFSA, but because they require the agreement of creditors, they are complex to arrange. It is necessary to appoint an accredited ‘debt agreement administrator’ to manage this process and negotiate with creditors. These administrators can charge high fees. Consumer advocates say that some administrators are too aggressive in their marketing of debt agreements to low-income earners. With few assets and little capacity to repay their debts, these people would sometimes be better off simply declaring bankruptcy.^[11]

Currently, the only other option provided by the personal insolvency system is a personal insolvency agreement (‘PIA’) under Part X of the Bankruptcy Act. Like debt agreements, PIAs allow individuals to avoid bankruptcy by making private agreements with their creditors.^[12] Unlike debt agreements, however, there are no asset, debt or income thresholds applicable to PIAs. Due to their complexity and cost, PIAs are rare. They are typically used by high-income earners whose business or professional activities would be severely curtailed by bankruptcy.^[13] In the 2024–25 financial year, there were only 210 new PIAs initiated, representing less than 2% of all personal insolvencies.^[14]