Financial hardship can be caused by a number of different circumstances, such as ill health, relationship breakdown or loss of employment. It's important to recognise any financial difficulties early so that you can immediately take steps to stop the debt from getting out of control.  

If you are suffering financial difficulty and find yourself unable to repay your debts, there are a number of formal options available to you under Australian bankruptcy laws. There are also informal options available to consider and it's always a good idea to exhaust all informal options first before considering formal options under the Bankruptcy Act

  1. Informal options

Before you think about choosing any of the formal options under bankruptcy laws, you should try to informally negotiate with each creditor (the person or institution you owe money to). It's a good idea to contact the creditor by phone first and follow up with a letter confirming what was discussed in the conversation. 

You can try to come to an arrangement with the creditors on your own, such as offering to pay by instalments, or by a reduced lump sum. Many institutions will cut a debt by half, if you agree to pay the whole amount straight away. 

If a debt collector contacts you, it's a good idea to be cooperative. In turn, you should also expect to be treated in a professional and reasonable manner. Any excessive or unreasonable conduct or contact on behalf of a debt collector may be unlawful. Read more about how to handle debt collectors. 

There is also free help available. You can talk to a financial counsellor from anywhere in Australia by phoning 1800 007 007 (minimum opening hours are 9.30 am – 4.30 pm Monday to Friday).

  2. Formal options

There are 3 formal options available under the Bankruptcy Act:

  1. Personal Insolvency Agreements - a formal agreement with your creditors to repay your debt. A controlling trustee is appointed to manage your property and financial affairs;
  2. Debt Agreements - a formal agreement between you and your creditors to repay by a lump sum or instalments. A proposal must be accepted by most of your creditors; or
  3. Bankruptcy - the process by which the State takes possession of the property of a bankrupt. The property is then distributed, on a scale, to creditors.  

Bankruptcy has serious consequences and you should always exhaust all informal options first. 

  3. Debt Agreements


A formal debt agreement is a legally binding agreement between you and your creditors under the Bankruptcy Act.  You can agree to pay your debts by instalments or by a reduced lump sum. The proposal must be accepted by most of your creditors (if there is more than 1). A proposal must be submitted to the creditor by the debtor. Creditors then vote as to whether they reject or accept the proposal. 

You can also get a 'freeze' on your debts, which gives you time to sort your finances out. There are restrictions on the persons that can formally apply for a debt agreement.


You can apply for a debt agreement if you meet the following criteria:

  1. You must be unable to pay debts when they are due
  2. You must not have been made bankrupt or entered into a debt agreement in the last 10 years;
  3. You must have unsecured debts of less than $107,307.20 (this amount is subject to change);
  4. Your income must be less than $80,480.40 (this amount is subject to change);
  5. You must pay the lodgement fees. 

Read more about Debt Agreements  or Download the Debt Agreement kit. 

  4. Personal Insolvency Agreements


A Personal Insolvency Agreement is a Deed or agreement to facilitate arrangements between debtors and creditors, which protect the debtor from bankruptcy, but ensure that creditors receive a benefit. 

Applying for a PIA is considered an 'act of bankruptcy' and has serious consequences. One such consequence of entering into a PIA, is that a trustee is appointed. A trustee will have immediate control of your property and financial affairs.  A trustee may also have the power to sell and deal with your property (subject to exclusions).  

The trustee is entitled to be paid a fee (the maximum fee at the moment is $5,000). There is no minimum threshold to be able to enter into a PIA.  

Other things to note:

  • You don't have to contribute from your income and you can operate a business (unless you have made an arrangement with your creditor);
  • You can't be the Director of a Company or a Professional. 
  • You can keep your assets but you can't sell your assets (unless you tell your creditors and they agree);
  • Creditors can repossess assets if you're in default of the agreement;
  • You can travel overseas. 
  • There are fees to lodge the agreement with the Australian Financial and Security Authority. 


The difference between a PIA and a Debt agreement is that with a PIA, you do not have to make contributions from your income and there are no asset or income thresholds to be eligible to apply. However, a trustee is appointed to manage your affairs so you will have less control over your own financial matters. 

In order to be eligible to apply for PIA, you must not have proposed a PIA in the 6 months prior to your application. In other words, you can apply for a PIA every 6 months if you are suffering financial hardship.

If you would like to apply for a PIA yourself, you can download our easy to complete DIY kit. 

  5. Bankruptcy


If you are unable to pay your debts and cannot come to a suitable repayment arrangement with your creditors, you can lodge a petition to become bankrupt (called a debtor’s petition). A creditor may also take action to have you declared bankrupt by order of the Court (called a sequestration order).

The Insolvency Trustee Service Australia (ITSA) is the government body that regulates bankruptcy.

You must have a connection to Australia to be able to petition for bankruptcy. There are no income or other threshold requirements. 


Bankruptcy has serious consequences and all options should be considered if you want to petition for bankruptcy.

The following will apply if you become formally declared bankrupt:

  1. There will be a permanent record on a national bankruptcy index. 

  2. Your debts are 'extinguished' (cancelled) and creditors can no longer contact you for repayment of the debt. 

  3. A trustee will be appointed to manage your finances;

  4. The trustee can sell your assets (with exceptions), recover certain income you earn and investigate your financial affairs. 

  5. You may be subject to certain restrictions, such as travelling overseas. You will need to request permission from your trustee before travelling overseas. 

  6. Your credit rating will be effected and it may be difficult to obtain a loan in the near future. 

  7. Bankruptcy generally lasts for about 3 years but can be extended in certain circumstances. 

In order to pay creditors, your trustee will:

  • Sell your assets, including those you acquire or become entitled to during your bankruptcy (although you will be able to keep certain types of assets)
  • Recover any income you earn over a certain limit; and

  • Investigate your financial affairs and may in certain circumstances recover property that you have transferred to someone else prior to your bankruptcy. 

Certain debts, assets and other property may be 'exempt' from the control of the trustee. Trustees must also adhere to certain standards while administering your property and affairs.

If you want to apply for Bankruptcy yourself, you can download the easy DIY kit. 

  6. Which option should I choose?

It's always best to approach your creditors first and try to work out an informal arrangement to repay your debt before considering any formal options. If all possible informal options have been exhausted, there are the 3 formal options under the Bankruptcy Act to consider. 

Each option has its own advantages and disadvantages. You should ensure that you understand what each option means, the eligibility requirements and the advantages and disadvantages, relevant to your specific circumstances.

Our Debt Management kits are affordable and include help with informal options and all formal options available, written in a simple to follow format. Or you can talk to a FREE financial counsellor from anywhere in Australia by phoning 1800 007 007. If you need help choosing the right option, you should seek professional advice. 

This article contains information of a general nature only and is not specific to your circumstances. This is not legal advice and should not be relied upon without independent legal or financial advice.