Personal Insolvency and Self-Employment
Bankruptcy, Part X personal insolvency agreements, and Part IX debt agreements for self-employed Australians. What each option means for your business, your director status, and starting again.
Self-employed Australians facing insolvency have three formal options under the Bankruptcy Act 1966: bankruptcy (three years and one day, all non-exempt assets vest in the trustee), Part X personal insolvency agreements (negotiated compromise with creditors, avoids bankruptcy label but carries similar director disqualification), and Part IX debt agreements (simplified alternative for unsecured debts under approximately $150,951 in 2026-27). You can continue operating as a sole trader during bankruptcy, but you are automatically disqualified from managing corporations while undischarged.
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Guidance, not advice. We explain the rules, we don't assess your situation. Always seek financial or tax advice from your accountant, or contact ATO. Read our editorial scope →
Bankruptcy under the Bankruptcy Act 1966
Bankruptcy is a personal (not corporate) process that typically runs for three years and one day from when AFSA accepts your bankruptcy form or statement of affairs. It can be extended to five or eight years for non-compliance with trustee obligations. All property vests in the trustee except protected categories: ordinary household goods, most regulated superannuation, one modest-value vehicle (equity up to approximately $9,600), and tools of trade (up to approximately $4,450). Non-exempt business assets, including stock, equipment above the threshold, and accounts receivable, are available to creditors.
Income contributions during bankruptcy
You can continue working, whether employed or self-employed. If your after-tax income exceeds AFSA's Base Income Threshold Amount, you must contribute 50% of the excess to your trustee each year. For 2026-27 with no dependants, the BITA is approximately $75,475 after tax. Higher thresholds apply with dependants: approximately $89,061 for one dependant, $95,854 for two, $99,628 for three, $101,137 for four, and $102,647 for five or more.
Operating restrictions
You may operate as a sole trader while bankrupt, with business profits counting as income for contribution purposes. You must trade under your own name or clearly disclose bankruptcy status when using another business name. You must notify credit providers of your bankruptcy if seeking credit over approximately $7,412. You cannot travel overseas without written permission from your trustee. Many professional licensing bodies (building, real estate, finance, law) may suspend or refuse licences during bankruptcy.
Part X personal insolvency agreements
A Part X PIA under the Bankruptcy Act 1966 is a formal alternative to bankruptcy that lets you compromise debts via a deed with creditors, administered by a trustee. You appoint a controlling trustee and put forward a proposal (lump sum, instalments, or a combination). If accepted by a prescribed majority in value of creditors, the agreement binds all unsecured creditors. A PIA is not bankruptcy, but while subject to an uncompleted PIA you are automatically disqualified from managing corporations and from acting as a director or secretary, identical to the bankruptcy disqualification under the Corporations Act 2001. There is no automatic prohibition on carrying on a business as a sole trader. The PIA is recorded on the NPII, and credit reporting agencies generally report PIAs similarly to bankruptcy. Once the PIA is fully complied with, the director disqualification ends.
Part IX debt agreements
A Part IX debt agreement is a simplified, lower-cost alternative to bankruptcy for individuals with relatively limited unsecured debts, assets, and income. Eligibility thresholds for 2026-27 are approximately $150,951 for maximum unsecured debts, $301,902 for maximum divisible property (assets), and $113,213 per year for maximum after-tax income. You must be insolvent (unable to pay debts as they fall due) and must not have been bankrupt, in a debt agreement, or in a PIA in the previous ten years. If a majority in value of voting creditors agree to your proposal, the agreement binds all unsecured creditors. You remain in control of your affairs with no vesting of assets in a trustee. Repayment typically runs three to five years at an agreed cents-in-the-dollar rate.
Director status under Part IX
A Part IX debt agreement does not automatically disqualify you from being a company director, unlike bankruptcy and Part X PIAs. However, many lenders, industry regulators, and licensing bodies treat a debt agreement as a serious negative event. NPII listing is removed five years after the agreement was made or two years after completion or termination, whichever is later.
Tax debts, SGC, and DPNs in personal insolvency
Tax liabilities existing at the date of bankruptcy are provable debts. On discharge, section 153 of the Bankruptcy Act 1966 releases the bankrupt from all provable debts including most tax debts, unless a specific exception applies (for example, fraud). Bankruptcy does not remove your obligation to lodge income tax returns, and the ATO can set off tax refunds during bankruptcy against existing tax or other Commonwealth debts. Superannuation Guarantee Charge has priority in bankruptcy under section 109(1C) of the Bankruptcy Act 1966 (since 5 May 2003), grouped with employee entitlements. Director penalties under lockdown DPNs for company PAYG or superannuation debts can survive a director's personal bankruptcy if the underlying obligations were not complied with before bankruptcy.
Starting again after insolvency
After discharge from bankruptcy, there are no bankruptcy-specific restrictions on operating as a sole trader. You can incorporate new companies and be appointed as a director. There is no blanket prohibition on obtaining or holding an ABN after bankruptcy; restrictions come from licensing regimes and ATO risk assessments, not the Bankruptcy Act itself. Credit access is severely affected for at least five years. Business lending after insolvency typically requires higher equity, security, or non-bank financiers. Even with Treasury's proposed reforms to shorten NPII listing periods, five to seven years of tougher credit conditions is realistic.
Statute references
- Bankruptcy Act 1966 (ss 82, 109, 153; Part IX debt agreements; Part X personal insolvency agreements)
- Corporations Act 2001 (director disqualification)
- Tax Administration Act 1953 (ATO collection, DPNs, SGC)
Frequently asked questions
Can I still run my business if I go bankrupt?+
Does bankruptcy automatically disqualify me from being a company director?+
How long does bankruptcy stay on my record?+
Are my tax debts wiped out by bankruptcy?+
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