02 May 2017

Dealing with personal debt: the four options


4 min

When does the initially unpalatable become palatable?

When personal debts get out of control, there are four alternatives to deal with the problem. They are:

  1. put your head in the sand and hope it goes away—not recommended!

  1. seek an informal arrangement with creditors to do a debt compromise. Gaining approval with several creditors can sometimes be difficult as all creditors must agree.
    However, this form of arrangement can’t include the Australian Taxation Office (ATO) as a creditor; the ATO can only discount principal debt through a formal arrangement (see alternative 3). This is a major consideration because most people have an ATO debt.

  1. make a formal proposal to creditors to ask them to accept an arrangement that is less than full payment of your debt, under the provisions of the Bankruptcy Act 1966, which provides two agreement types—Part IX (part 9: debt agreement) or a Part X (part 10: personal insolvency agreement). The two agreements are distinguished by Australian residency/business connection criterion, previous insolvency conditions, and for Part X: income, asset, and debt thresholds apply.

  1. petition to become bankrupt. While bankruptcy may sound like a dirty word or at least seem unpalatable—in many ways, it’s the best alternative.

Ignoring the problem by putting your head in the sand never provides the certainty necessary to allow people to get on with their lives and start accruing assets.

We say that bankruptcy is often the best alternative for dealing with personal debt problems. In the words of the late professor Julius Sumner Miller, “Why is it so?”

The reasons for this statement are many:

  1. It brings a definite end to current debt problems.

  1. It ends, at least within a very short time, stressful calls from creditors and their debt collectors. Those creditors and debt collectors then deal with the bankruptcy trustee exclusively.

  1. It sets a specific time, three years, for which bankruptcy applies. Yes, in limited and specific circumstances the bankruptcy period can be extended e.g. not cooperating with the bankruptcy trustee.

  1. Once the bankruptcy period is finished, people can again start accruing assets with no relationship or impact on the previous debts extinguished under the bankruptcy.

Whereas, under both Part IX and Part X of the Bankruptcy Act, there is no certainty that by creditors accepting the agreement that it will be the end of current debt problems because your circumstances can change in the term of the agreement. For example, making payments when the agreement commences may be viable, but what if life events like an employment loss, or having a baby, changes the ability to make the agreed payment amounts.

Yes, you can certainly ask creditors to agree to a variation that reduces your payments but this often extends the agreement term. And the debt problems don’t become truly behind you. Often, when the agreement terms are no longer favourable to creditors, the agreement ends up being terminated and debtors are left only to contemplate bankruptcy as a solution. This then means the agreement costs and all payments made are wasted. Given the change of circumstances, it brings debtors back to bankruptcy because all the debts are still there as they were before you entered the Part IX or Part X.

Not only that, the payment contribution periods under Part IX and Part Xs are often one or two years longer (at least) than the standard three-year bankruptcy period. The reason for the longer agreement term is that certain creditors require a minimum rate of return on their debts before they can vote in favour of any agreement proposal; the only way this can be achieved is by increasing the number of payments.

This extended payment period puts people under excessive pressure to maintain payments, in view of how their life changes, and paying for debts long after they would have been discharged from bankruptcy.

Given all these factors, for people with debt problems, bankruptcy is in many ways, the best solution. It brings the debt problem to an end once and for all.

Importantly, debtors must seek the right advice for their circumstances. This advice should come from appropriately qualified specialists. All too often we hear of debtors seeking advice from organisations that in our view aren’t acting in the best interests of the debtor. At Worrells, we offer all insolvency services, including Part IXs, Part Xs and bankruptcy, therefore we will always provide the appropriate advice based upon the debtor’s circumstances.

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