When debts have become unmanageable, you may be considering bankruptcy but wondering whether a Personal Insolvency Agreement could provide another way forward.

Both are formal personal insolvency options available under Australian law, but they work very differently.

A Personal Insolvency Agreement (PIA) can provide greater flexibility because you and your creditors agree on how your debts will be dealt with. Depending on the proposal, you may be able to retain particular assets or complete the arrangement sooner than bankruptcy.

Bankruptcy, on the other hand, does not require creditors to approve a proposal. It provides a structured legal process for dealing with most unsecured debts but can have greater consequences for assets, income and other areas of your financial position.

So, which is better?

Neither option is automatically better.

The right approach depends on your debts, assets, income, business interests, ability to fund a proposal and what your creditors are likely to accept.

As a Registered Trustee specialising in personal insolvency and bankruptcy, I look at the complete financial position before recommending either pathway.

Bankruptcy vs PIA: A Quick Comparison

The Australian Financial Security Authority (AFSA) provides a detailed comparison of Australia's formal insolvency options and confirms that PIAs and bankruptcy have different consequences for assets, income, business activities and restrictions.

What Is Bankruptcy?

Bankruptcy is a formal legal process for individuals who are unable to pay their debts.

You can apply voluntarily for bankruptcy, or in some circumstances a creditor can apply to the court to have you made bankrupt.

Once bankruptcy begins, a trustee is appointed to administer your financial affairs.

Bankruptcy generally lasts for three years and one day, although it can be extended in certain circumstances.

During bankruptcy:

• Most unsecured debts are dealt with
• Certain assets may be available to your trustee
• Income contributions may apply if your income exceeds the relevant threshold
• Overseas travel requires your trustee's permission
• Restrictions can apply to managing companies and certain occupations

Bankruptcy can provide significant relief, but the consequences should be carefully understood before making a decision.

You can learn more through Clare Corrigan's Bankruptcy Services page.

What Is a Personal Insolvency Agreement?

A Personal Insolvency Agreement, commonly called a PIA or Part X agreement, is a legally binding arrangement between an insolvent person and their creditors.

Instead of entering bankruptcy, you put forward a proposal explaining how you intend to deal with your debts.

The proposal might include:

• A lump sum payment
• Instalment payments
• Sale of particular assets
• Contributions from future income
• Money contributed by a family member or another third party
• A combination of these arrangements

There are no prescribed debt, income or asset limits for proposing a PIA.

However, being eligible to propose one does not mean creditors will accept it.

A controlling trustee must investigate your financial affairs and provide creditors with a report comparing the proposed PIA with the likely outcome if you became bankrupt.

You can learn more through Clare Corrigan's Personal Insolvency Agreement service page.

How Are Assets Treated Differently?

For many people, this is one of the most important differences.

Assets During Bankruptcy

When you become bankrupt, certain property becomes available to your trustee.

Some assets are protected, including ordinary household goods and certain vehicles and tools within applicable limits.

Other assets may be sold for the benefit of creditors.

This can potentially include your interest in:

• Real estate
• Investment property
• Shares
• Valuable assets
• Certain business interests

If you are particularly concerned about property, the article Will I Lose My House If I Go Bankrupt? explains this in greater detail.

Assets Under a PIA

A PIA provides more flexibility.

You may be able to retain assets if the proposal accepted by creditors allows you to do so.

For example, a family member might contribute funds that provide creditors with a better return than they would receive if your interest in an asset were sold during bankruptcy.

However, a PIA should not be viewed simply as a way to protect assets

Creditors need a commercial reason to accept the proposal, and the controlling trustee must compare the proposed outcome with bankruptcy.

What Happens to My Income?

Bankruptcy has statutory income contribution rules.

There is no maximum amount you can earn while bankrupt. However, if your assessed after-tax income exceeds the threshold applicable to your circumstances, compulsory contributions may apply.

The thresholds are indexed and depend partly on the number of qualifying dependants you have.

You can read more in What Happens to My Income During Bankruptcy?

A PIA works differently.

There is no automatic statutory income contribution formula equivalent to bankruptcy. Instead, your agreement determines whether income payments are required and how much you need to contribute.

This can give a PIA greater flexibility, but the proposed payments must still be realistic and acceptable to creditors.

Do Creditors Have to Agree?

This is one of the biggest differences between the two options.

You do not need creditor approval to apply voluntarily for bankruptcy.

A PIA, however, depends on creditor acceptance.

The controlling trustee investigates your circumstances and arranges a creditors' meeting.

For the proposal to be accepted, AFSA states that it must receive a special resolution. This requires:

• A majority in number of creditors voting in favour; and
• At least 75% of the dollar value of debts represented by those voting to support the proposal.

If the required vote is achieved, creditors with provable debts are generally bound by the agreement.

This means a PIA needs to provide creditors with a proposal they consider worthwhile.

What Happens If Creditors Reject My PIA?

There is no guarantee that a PIA proposal will be accepted.

If creditors reject it, they may be able to resume debt recovery action.

AFSA also confirms that proposing a PIA involves committing an act of bankruptcy.

If the proposal fails, a creditor may potentially take steps to make you bankrupt where the legal requirements are satisfied.

This is why a PIA should not be used simply to see whether creditors might accept a discounted settlement.

Before starting the process, the proposed funding needs to be realistic and the likely bankruptcy outcome should be properly assessed.

Which Option Gives Me More Flexibility?

Generally, a PIA provides greater flexibility.

The agreement can be designed around:

• Available assets
• Income
• Lump sum funding
• Third-party contributions
• Business interests
• Particular assets you hope to retain

The length of the PIA also depends on its terms rather than having a standard statutory period.

Bankruptcy is more structured.

The Bankruptcy Act determines how assets, income and many other matters are dealt with, leaving less room to negotiate individual arrangements with creditors.

Greater flexibility, however, does not automatically make a PIA better. You need the financial capacity to put forward an acceptable proposal.

Can I Continue Running a Business?

This requires careful consideration under both options.

Bankruptcy does not necessarily prevent you from working or operating as a sole trader, although restrictions apply.

An undischarged bankrupt cannot manage a corporation or act as a company director unless permission is obtained from the court.

A PIA may allow you to continue operating a business where its terms permit.

However, ASIC confirms that a person subject to a PIA is also disqualified from managing a corporation until the terms of the agreement have been fully complied with, unless the court grants leave.

For company directors and business owners, this distinction is particularly important and should be considered before choosing either pathway.

How Do Bankruptcy and a PIA Affect My Credit Record?

Neither option should be considered private.

Bankruptcy information appears on the National Personal Insolvency Index (NPII), Australia's public record of personal insolvency proceedings.

A PIA is also recorded on the NPII, and AFSA confirms that the record of the controlling trustee authority remains there permanently.

Both options can also affect your credit file.

AFSA states that bankruptcy generally appears on a credit report for five years from the bankruptcy date or two years after bankruptcy ends, whichever is later.

A PIA generally appears on your credit file for up to five years, and sometimes longer.

A PIA should therefore not be selected on the assumption that it leaves no public or credit history.

What About Overseas Travel?

Bankruptcy includes a specific overseas travel restriction.

If you are bankrupt, you need your trustee's written permission before travelling overseas.

A PIA does not have the same statutory restriction on overseas travel.

For someone whose work or family circumstances require regular international travel, this may be an important practical consideration.

However, it should be weighed against the other financial and legal consequences of the PIA.

Is a Personal Insolvency Agreement More Expensive?

A PIA involves professional fees for investigating your financial circumstances, preparing the proposal, reporting to creditors and administering the agreement if accepted.

AFSA notes that PIAs tend to involve comparatively higher fees and charges and are often used for more complex financial situations.

In 2024–25, AFSA recorded only 210 PIAs, compared with 6,930 bankruptcies, demonstrating that PIAs remain a relatively specialised formal insolvency option.

A PIA therefore needs to provide enough financial benefit to justify its costs.

When Might Bankruptcy Be More Appropriate?

Bankruptcy may deserve consideration where:

• Debts are clearly unmanageable
• There is no realistic ability to fund a PIA
• There are few non-exempt assets to protect
• Creditors are unlikely to accept a proposal
• Most debts are debts that bankruptcy can deal with
• A structured resolution is required without creditor negotiation

This does not mean bankruptcy is automatically appropriate in these circumstances.

Your assets, income, employment and other consequences still need to be considered.

When Might a PIA Be More Appropriate?

A PIA may deserve consideration where:

• You have significant assets you want to retain
• A family member or third party can contribute funds
• You have sufficient income to fund an arrangement
• You have substantial business or tax debts
• Your financial affairs are more complex
• Your proposal could provide creditors with a better outcome than bankruptcy
• You need greater flexibility around how assets and payments are dealt with

The central question is whether the proposal is realistic and provides an outcome creditors are prepared to accept.

Bankruptcy vs PIA: Which Is Better for You?

There is no universal answer.

A PIA may offer greater flexibility and allow particular assets to be retained, but it requires creditor approval, involves additional costs and carries the risk that the proposal may fail.

Bankruptcy does not require creditor approval when entered voluntarily, but it operates under a more rigid legal framework and can have greater consequences for assets, income and overseas travel.

The best option depends on your actual financial position.

When I assess bankruptcy against a Personal Insolvency Agreement, I consider:

• Your debts and creditors
• Assets and available equity
• Income and future earning capacity
• Business interests
• Personal guarantees
• Tax liabilities
• Possible third-party contributions
• Likely returns to creditors
• The consequences of bankruptcy
• Whether a PIA proposal would be realistic

How Clare Corrigan Can Help

My role is not to favour one process over another. It is to help you understand which pathway is more appropriate for your circumstances.

If you are experiencing financial difficulty and are considering bankruptcy or a Personal Insolvency Agreement, contact Clare Corrigan to arrange a confidential discussion about your financial position and the options available.