Debt Consolidation vs Insolvency

Consolidation earns its place often. The situations where it clearly works share a pattern.

• The debt is expensive rather than unmanageable, sitting on cards and short-term facilities at high rates
• Income is stable and provable, and has not fallen permanently
• There is equity in property, or capacity to service an unsecured loan on a real term
• The cause of the debt was an identifiable event that has now passed
• The behaviour that created it has been addressed, not merely regretted
• A single repayment removes the timing failures that caused most of the arrears

Where those hold, restructuring is not a delay. It is the correct financial answer, and it usually costs far less than the alternative in both money and consequence.

The counter-cases matter more, because this is where a broker with a commission has an incentive to keep quiet. We would rather lose the file.

• The total debt exceeds what any realistic income could service over any term
• Repayments are already being funded by new borrowing
• Balances are still rising month on month despite payments
• The business is not viable at current trading levels, and finance would only extend the runway
• The only available security is a home that would be at genuine risk
• You have consolidated before and the debts rebuilt within two years
• Creditors are already enforcing, and the enforcement reflects a real solvency issue rather than a timing one

We say the true number early. Bad news travels better when it travels straight.

What follows is a general explanation so you know what the words mean before you walk into a meeting. It is not advice, and none of these decisions should be made without a registered practitioner. Personal insolvency in Australia sits under the Bankruptcy Act and is overseen by the Australian Financial Security Authority.

Part IX debt agreement

A formal, legally binding arrangement in which you propose to pay creditors an amount you can afford, usually over a period, and they vote on it. It is available only where you fall within eligibility thresholds for debt, assets and income. It is an act of bankruptcy, it is recorded on the National Personal Insolvency Index, and it appears on your credit file. It is administered by a registered debt agreement administrator.

Part X personal insolvency agreement

A more flexible formal arrangement with no eligibility thresholds, administered by a registered trustee. You appoint a controlling trustee, a proposal is put to creditors, and they vote. It suits larger or more complex positions than a debt agreement, and it is also an act of bankruptcy recorded on the index.

Bankruptcy

A formal process, entered voluntarily or by court order, in which a trustee administers your affairs. Most provable debts are dealt with, but not all: certain fines, child support and student assistance debts generally survive. There are consequences for assets above statutory limits, for income above a threshold, for travel and for some occupations, and the record on the index is permanent even though credit file listings expire.

Where the debt sits in a company, the framework is different again and sits under the Corporations Act. Directors carry duties throughout, and those duties do not pause while you look for finance.

Two points directors routinely miss. Personal guarantees survive most of these processes, so a company outcome does not automatically resolve your personal position. And director penalty exposure for unpaid PAYG withholding and superannuation guarantee charge can survive an appointment altogether, depending on what was lodged and when.

Personal guarantee

Your own promise to pay a company debt. It survives most company processes, which is why a company outcome does not automatically settle your personal position.

Director penalty

Personal liability for certain company tax debts, including PAYG withholding and the superannuation guarantee charge. What was lodged, and when, decides how it can be answered.

Provable debt

A debt that can be dealt with in a formal insolvency. Not everything is provable, which is why bankruptcy does not clear every liability.

Act of bankruptcy

A formal step that can found a bankruptcy. Both a debt agreement and a personal insolvency agreement are acts of bankruptcy, which surprises most people who read the brochures.

National Personal Insolvency Index

The public record of personal insolvency administrations in Australia, maintained by the Australian Financial Security Authority. Entries outlast credit file listings.

Financial counsellor

A free, independent adviser who explains your options and negotiates hardship arrangements directly with creditors. Not a debt management firm, and not paid by you.

A general comparison to frame the conversation. Your circumstances will change several of these lines, and only a registered practitioner can tell you how.

1. 01

   Build the real total

   Every debt, every limit, every rate, every arrear, plus tax and super. Most people are carrying a different number to the one in their head, and the decision cannot be made on an estimate.

2. 02

   Establish the honest income

   What comes in reliably, not in a good month. For a business, what it earns at current trading levels rather than at the level you are hoping to return to.

3. 03

   Test serviceability at a sensible rate

   Can that income service that total over a sensible term, with living costs covered. This single test answers the liquidity or solvency question.

4. 04

   If it services, restructure

   Consolidate, set the terms deliberately with splits, close the old accounts and automate the repayment.

5. 05

   If it does not, get the right adviser

   A free financial counsellor costs nothing and can negotiate hardship arrangements. A registered trustee or administrator can explain the formal options properly.

6. 06

   Do not delay the harder conversation

   Every month spent avoiding it adds interest, adds enforcement risk and removes options. The formal processes work better when they are entered early rather than at the end.

We are a finance and mortgage brokerage. We arrange credit through a panel of more than forty lenders, and that is the whole of what we do. We are not lenders, not a debt management firm, not credit repairers, not tax agents and not insolvency practitioners.

• We will model consolidation honestly, showing the monthly repayment and the total cost over the full term
• We will tell you when the numbers do not support another loan, and we will tell you early
• We will point you to a free financial counsellor, a registered trustee or an insolvency practitioner when that is the right call
• We will work alongside your accountant and your lawyer rather than around them
• We will not arrange finance we do not believe you can service