When the money is not there, not all debts are equal — some lose you the house, the ute or your licence fast; others can wait. And if it has gone past juggling, personal insolvency (a debt agreement or bankruptcy) releases most unsecured debt but with real trade-offs. Here is the triage and the options, for a sole trader (not a Pty Ltd).
Free help. National Debt Helpline 1800 007 007 · Small Business Debt Helpline 1800 413 828 — independent, confidential, not debt collectors.
Triage — which debts come first
There is no fixed legal "priority list" — financial counsellors rank by how fast and how badly non-payment bites:
- Highest: rent or mortgage (eviction or repossession — worse if it is also your work base), work-vehicle finance (repossession can shut the business down), and mandatory insurances (PL and workers' comp — lapse and you cannot legally work many sites).
- Next: the ATO (engage early to head off a garnishee of your bank or a major client), and secured loans over essential tools.
- Lower (negotiate harder): credit cards, unsecured loans, BNPL, old phone and utility bills.
The rule: protect the roof, the ute, the tools and the insurance that keep you earning, then negotiate the rest.
Personal insolvency — the two paths
Both run under the Bankruptcy Act 1966 (administered by AFSA) and release most unsecured debt, but differ:
- Part IX debt agreement — a formal compromise where unsecured creditors accept a reduced amount over 3-5 years. Only available below AFSA thresholds on debts, assets and income, and if you have not been bankrupt or in an agreement in the last 10 years. You usually keep your assets (home equity, vehicle, tools) as long as secured repayments continue, and you can generally keep trading as a sole trader. It goes on your credit file and the National Personal Insolvency Index and is itself an "act of bankruptcy".
- Bankruptcy — a trustee takes control of your divisible assets and most unsecured debts are wiped at the end. The standard period is 3 years and 1 day from when the trustee accepts it. The trustee can sell non-exempt assets (property equity, non-essential vehicles above a threshold), but basic household goods and tools of trade are protected up to an index-linked cap (you keep a reasonable kit to keep earning), and income contributions apply if your income exceeds a threshold.
Which suits: a debt agreement fits modest assets and income where you can pay something; bankruptcy is the "clean slate" when debts and ATO arrears are too high with limited equity.
Can you keep trading?
- While bankrupt there is no blanket ban on working — you can keep operating as a sole trader, but the business name must include your own name (e.g. "John Smith Plumbing") unless you notify the trustee.
- Tools of trade are protected up to the cap; high-value machinery or extra vehicles above it are at risk.
- Contractor licences are not automatically cancelled, but building regulators can impose conditions (NSW, for instance, can cap contract values for a bankrupt licensee) under "fit and proper person" scrutiny — and commercial or government clients run insolvency checks and may decline a bankrupt contractor.
ATO debts in insolvency
- Usually wiped at discharge: income tax, GST, PAYG instalments and many penalties arising before the bankruptcy or agreement (the ATO keeps any refunds during bankruptcy to offset old arrears).
- Survive: student loans (HELP/SFSS), child support, and many court fines.
- As a sole trader you do not get a Director Penalty Notice (that is a company-director thing — see ATO Audits & Disputes) — but if the business keeps running, you must keep BAS and PAYG current to avoid new arrears outside the insolvency.
The first 48 hours
- Map the damage — list every debt (balances, arrears, what is secured), flag defaults, demands, garnishees and legal threats.
- Triage the priority debts (housing, vehicle, insurances, imminent ATO dates).
- Get a financial counsellor — NDH 1800 007 007 (personal) or SBDH 1800 413 828 (business), usually same or next day — ask about Part IX vs bankruptcy and get help with hardship letters.
- Contact key creditors early — landlord or lender hardship, an ATO payment plan, vehicle and tool finance hardship.
- Avoid the "debt fixer" traps — get free, independent advice before signing any debt agreement or new credit.
Common mistakes
- Paying the loudest creditor (a credit card) before the mortgage or the ute.
- Ignoring the ATO until it garnishees a client instead of negotiating a plan.
- Paying a high-fee "debt fixer" instead of a free financial counsellor.
- Assuming bankruptcy takes your tools (a reasonable kit is protected).
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