Personal Insolvency for Directors: When Debt Turns Personal

Reviewed by Alex Hanley, Chartered Accountant — H&H Tax and Business Advisors
Last reviewed: 13 July 2026

Personal insolvency is the legal framework that applies when an individual cannot pay their personal debts as they fall due. In Australia it is governed by the Bankruptcy Act 1966 (Cth) and regulated by the Australian Financial Security Authority (AFSA) — a separate system from company insolvency, which runs under the Corporations Act 2001 and ASIC. For company directors, personal insolvency usually enters the picture when company debt becomes personal debt: through personal guarantees, director penalty notices, or insolvent trading claims. The formal options, from least to most serious, are a debt agreement (Part IX), a personal insolvency agreement (Part X), and bankruptcy.

If you are reading this, the company’s problems have probably started knocking on your own front door — a guarantee being called up, a DPN on the table, or a creditor threatening bankruptcy. That is frightening, and it is also survivable. There is a defined ladder of options between “under pressure” and “bankrupt”, and and acting early is what keeps the higher rungs open.

If you would rather talk it through with a person first, call 0468 061 936 — confidential, no obligation — or send an enquiry and we’ll call you back.

How company debt becomes personal debt

A company is a separate legal person, and as a director you are generally not liable for its trading debts. But there are four common doors through which company debt walks into your personal life — AFSA, ASIC and ARITA describe the first three in their joint guidance on personal bankruptcy and the liquidation of a company:

1. Personal guarantees. Banks, landlords and suppliers often require directors to guarantee the company’s obligations. If the company cannot pay, the creditor can pursue you directly — the debt is yours by contract.
2. Director penalty notices (DPNs). Unpaid PAYG withholding, GST and superannuation guarantee charge can be recovered from directors personally through the ATO’s director penalty regime. Our DPN hub explains the 21-day window and the difference between remittable and lockdown penalties.
3. Insolvent trading claims. If the company keeps incurring debts after becoming insolvent, a director can be made personally liable to compensate for those debts under section 588G of the Corporations Act 2001 — typically pursued by a liquidator after the company fails, whether or not you gave any guarantee.
4. Overdrawn director loan accounts. Money drawn from the company and recorded as a loan to you remains a debt you owe the company; in a liquidation, the liquidator can demand it back as a company asset.

None of this is automatic — each door has its own legal test, and good advice starts with finding out which are actually open in your case. The earlier you map your exposure, the more options stay open on both sides.

Two different legal systems — and why directors often face both

Company insolvency and personal insolvency run under different laws, regulators and practitioners:

A struggling director frequently has one foot in each system: the company’s position needs resolving under the Corporations Act, while guarantees, director penalties and insolvent trading risk sit under the Bankruptcy Act if they can’t be paid. The two decisions interact, but they are made separately — and a company-side fix does not automatically fix the personal side (a lockdown DPN is the sharpest example).

Restructure Partners is an Australian specialist restructuring and insolvency advisory. Our core work is the company side — helping directors understand options and connecting them with ASIC-registered practitioners when a formal appointment is needed. We do not administer personal insolvency: debt agreements are administered by registered debt agreement administrators, and bankruptcies and personal insolvency agreements by registered trustees or the Official Trustee, all regulated by AFSA. What we can do is help you see how the company and personal pictures fit together before you commit to anything. Free, independent help is also available from financial counsellors via the National Debt Helpline on 1800 007 007. (AFSA)

The personal insolvency ladder

Think of the personal options as a ladder, from informal to formal. Each rung down is more powerful against creditors — and carries heavier, longer-lasting consequences for you:

1. Informal arrangements — negotiating directly with creditors (including the ATO), with no formal insolvency process at all.
2. Temporary debt protection (TDP) — a formal 21-day breathing space under the Bankruptcy Act during which unsecured creditors cannot enforce a judgment against you. (AFSA)
3. Debt agreement (Part IX) — a binding compromise with creditors, subject to indexed debt, asset and income limits.
4. Personal insolvency agreement (Part X) — a binding, flexible settlement with no eligibility limits, involving a trustee.
5. Bankruptcy — the final rung: most debts released, but your assets, income and freedom of action come under a trustee’s control.

The order matters: the higher rungs do far less damage to a director’s ability to keep running a company.

Informal arrangements: always the first conversation

Before any formal process, ask whether creditors will deal. Settlements, payment plans and moratoriums agreed directly leave no mark on any public register and impose no restrictions on you as a director. The ATO — usually a director’s biggest creditor — has established processes for payment plans and hardship arrangements; our ATO debt page covers how they work. An informal deal needs every relevant creditor to agree — its weakness — but with a short creditor list it is often the fastest, least damaging fix.

Debt agreements (Part IX): the capped middle option

A debt agreement is a legally binding arrangement under Part IX of the Bankruptcy Act in which you pay creditors an affordable percentage of your combined debt over time, through a registered debt agreement administrator. When you complete the payments, your creditors cannot recover the rest. (AFSA — What is a debt agreement?)

The important boundaries, from AFSA’s guidance:

• Eligibility is capped. You must be insolvent, and your unsecured debts, your assets, and your expected after-tax income for the next 12 months must each be below set thresholds. The thresholds are indexed and change twice a year — check AFSA’s indexed amounts page rather than relying on any figure quoted online.
• The 10-year rule. You are not eligible if you have been bankrupt, had a debt agreement, or had a personal insolvency agreement in the last 10 years.
• Duration. Up to 3 years — or up to 5 years if you own your home.
• It is an act of bankruptcy. Proposing a debt agreement is itself an “act of bankruptcy”, which a creditor could use to apply to make you bankrupt if the proposal fails. (AFSA — Consequences of a debt agreement)
• It is public and affects credit. Your name appears on the National Personal Insolvency Index (NPII) for a limited time, and on credit reports for up to 5 years or longer. If you trade under a business name that is not your own name, you must tell the people you do business with that you are in a debt agreement. (AFSA)

For directors, one point deserves emphasis: unlike bankruptcy and PIAs, AFSA lists no restriction on managing a corporation for a person in a debt agreement — but confirm your own position before relying on that.

Personal insolvency agreements (Part X): flexible, uncapped — with a director catch

A personal insolvency agreement (PIA) is a legally binding agreement between you and your creditors under Part X of the Bankruptcy Act — a way to settle debts without becoming bankrupt. A trustee takes control of your property and puts an offer to your creditors: part or all of your debts, by instalments or a lump sum. There are no debt, asset or income limits, the terms are whatever you can negotiate, and you may keep assets such as your house or car if the agreement allows. (AFSA — What is a PIA?)

PIAs suit the situation many directors are in: debts too large for a debt agreement, a genuine offer to make, and strong reasons to avoid bankruptcy. But the consequences are serious. According to AFSA’s PIA consequences guidance:

• Entering a PIA is an act of bankruptcy — if the PIA fails, a creditor can use it to apply to make you bankrupt.
• You cannot manage a corporation until the terms of the agreement have been finalised. For a working director this is the headline consequence: a PIA suspends your ability to act as a director until you have done everything the agreement requires. (AFSA; see also s 206B, Corporations Act 2001)
• Your details appear on the NPII permanently, and on your credit file for up to 5 years or longer.
• You cannot deal with your property without your controlling trustee’s consent, though you may be able to keep running your business if the terms allow.

Weighing a settlement against bankruptcy — and what either means for the company you run — is a two-sided question worth mapping before you commit. Call 0468 061 936 for a confidential, no-obligation conversation, or send an enquiry.

Bankruptcy: the last rung

Bankruptcy is a legal process where you are declared unable to pay your debts. It releases you from most unsecured debts and gives a genuine fresh start — at a real cost. It normally lasts 3 years and 1 day. (AFSA — What is bankruptcy?)

There are two ways in:

1. Voluntary bankruptcy (debtor’s petition). You apply by completing a Debtor’s Petition and a Statement of Affairs and submitting them to AFSA. There is no fee to apply. (AFSA)
2. A creditor makes you bankrupt (creditor’s petition). A creditor with a final court judgment for $10,000 or more can serve a bankruptcy notice; failing to comply within 21 days is an act of bankruptcy, which allows the creditor to apply to the court for a sequestration order making you bankrupt. (AFSA — Bankruptcy notice; AFSA — Make someone bankrupt) This judgment → bankruptcy notice → petition sequence is the pathway the ATO can ultimately take over an unpaid director penalty — which is why engaging early with the DPN process matters so much.

Once you are bankrupt, a trustee is appointed — a registered trustee you nominate, or the Official Trustee (AFSA). Drawing on AFSA’s consequences of bankruptcy guidance, the trustee’s control covers:

• Your assets. The trustee can sell your assets — including your house — to pay creditors. You keep ordinary household goods, tools used to earn an income up to a set amount, and vehicles up to a set amount (indexed — check AFSA).
• Your income. If you earn over a set amount, you must make compulsory payments (income contributions) to your trustee. The threshold depends on your circumstances, including dependants, and is indexed — AFSA publishes a calculator; do not rely on any hard figure quoted elsewhere.
• Your travel. You must have your trustee’s written permission to travel overseas; travelling without it is an offence.
• Your record. Your name appears on the NPII permanently — even after discharge — and credit agencies record the bankruptcy for 5 years from the date you became bankrupt, or 2 years from when it ends, whichever is later.
• How long it runs. The 3-years-and-1-day clock starts when AFSA accepts your application (or, on a creditor’s petition, when you file a Statement of Affairs that AFSA accepts). In some cases the trustee can lodge an objection extending the bankruptcy to up to 8 years — typically for non-cooperation. (AFSA)

Bankruptcy also does not release every debt — some obligations survive it. Check AFSA’s guidance on what happens to your debts before assuming a particular debt goes away.

What bankruptcy means for a director specifically

For most people, bankruptcy is about assets, income and credit. For a director there is a further layer, set out in the joint AFSA/ASIC/ARITA guidance on personal bankruptcy and the liquidation of a company:

• You cannot continue as a company director. An undischarged bankrupt is disqualified from managing corporations under section 206B of the Corporations Act 2001. The moment you become bankrupt, you must stop acting as a director — of every company.
• Your shares pass to your trustee. Any shares you own vest in your trustee in bankruptcy. You no longer own them; the trustee decides whether to sell them or, in some cases, to place the company into liquidation. (AFSA)
• ASIC’s records follow you. The disqualification is reflected in ASIC’s registers, and acting as a director while disqualified is a criminal offence.
• Your credit and counterparties are affected. The NPII listing is permanent and searchable; banks, landlords, insurers and suppliers routinely check it. Rebuilding commercial credibility is possible — many people do it — but it takes time.

The practical upshot: if the company is viable and you are central to it, bankruptcy is not just a personal event — it can end the business too. That is why the higher rungs, and the company-side options that reduce your exposure in the first place, come first.

If you have just read that list with your own house and your own company in mind: bankruptcy is the bottom rung of the ladder, and most directors who get advice before judgment never stand on it. Call 0468 061 936 — confidential, no obligation — or send an enquiry and we’ll call you back. A phone conversation appears on no public register — unlike every formal option on this page.

Protecting your position honestly

When bankruptcy feels close, a tempting thought arrives: move the house, the car, the savings — get them out of reach. Do not act on it.

The Bankruptcy Act contains clawback provisions that let a trustee unwind pre-bankruptcy transactions: transfers of property for less than market value can be recovered, and transfers made with the intention of defeating creditors can be recovered with no time limit. (ss 120–121, Bankruptcy Act 1966) Concealing or disposing of property can also be a criminal offence. A panicked transfer to a spouse or family trust does not protect the asset — it adds a legal fight, costs and suspicion, and can drag the people you were trying to protect into litigation.

Protecting your position honestly looks different:

• Move early, not assets. The biggest protection is time — negotiating before judgment, dealing with a DPN inside its 21-day window, restructuring the company before guarantees are called.
• Know your real exposure. List every guarantee, penalty and claim, and get advice on which are enforceable and for how much. It is often smaller — or differently shaped — than the fear suggests.
• Use the ladder. A well-put settlement offer (informal or through a PIA) often returns creditors more than a bankruptcy would — which is exactly the argument that gets deals done.
• Get regulated help. Formal personal insolvency runs through AFSA-regulated administrators and trustees; free financial counselling is available on 1800 007 007. Be wary of anyone promising to make debts disappear or to “protect” assets through last-minute transfers — AFSA warns specifically about untrustworthy advisers. (AFSA)

Before bankruptcy: the alternatives that keep a director standing

If the pressure driving you toward personal insolvency is company debt, the highest-value moves are usually on the company side, made early:

1. Negotiate with the ATO. Payment plans and hardship arrangements resolve a large share of director-level tax pressure without any formal insolvency. See ATO debt help and ATO payment plans.
2. Deal with a DPN inside its window. A non-lockdown DPN can still be remitted within 21 days by putting the company into an appropriate formal process. Start at the DPN hub.
3. Resolve the company properly. Voluntary administration or liquidation stops company debts compounding and can cap the personal exposure flowing from guarantees and penalties — and a company process handled well often makes a personal settlement offer credible to creditors.
4. Then choose a personal rung, if one is still needed — informal deal, debt agreement, PIA — with bankruptcy as the last option, not the first.

Debt agreement vs PIA vs bankruptcy: side by side

Sources: AFSA — debt agreements · AFSA — PIAs · AFSA — bankruptcy.

Which rung is realistic for you depends on the exact mix of guarantees, penalties and assets — and on what can still be fixed on the company side first. Call 0468 061 936 — confidential, no obligation — or send an enquiry.

Frequently asked questions

Does my company’s debt automatically become my personal debt?

No. A company is a separate legal person, and directors are generally not personally liable for its trading debts. The main exceptions are personal guarantees you have signed, director penalty notices for unpaid PAYG withholding, GST and superannuation, insolvent trading claims, and security you have given over personal assets. If none of those apply, company debt usually stays with the company.

Can I be a company director while bankrupt?

No. Under section 206B of the Corporations Act 2001, an undischarged bankrupt is disqualified from managing corporations. You cannot continue as a director while bankrupt, and any shares you own pass to your trustee in bankruptcy. The disqualification ends when the bankruptcy ends — normally 3 years and 1 day, unless it is extended.

How long does bankruptcy last in Australia?

Bankruptcy normally lasts 3 years and 1 day from the day AFSA accepts your application — or, if a creditor made you bankrupt, from the day you file a Statement of Affairs that AFSA accepts. In some cases the trustee can lodge an objection extending the bankruptcy to up to 8 years. Your name stays on the National Personal Insolvency Index permanently, even after discharge.

Can the ATO make me bankrupt over a director penalty?

It is possible, but only at the end of a process. The ATO must first sue and obtain a court judgment against you personally. With a final judgment debt of $10,000 or more, it can then serve a bankruptcy notice; failing to comply within 21 days is an act of bankruptcy, which lets the ATO ask the court to make you bankrupt through a creditor’s petition. Engaging early — payment plans, the DPN remission window, a negotiated settlement — is how directors keep matters short of that point.

What is a debt agreement and am I eligible?

A debt agreement (Part IX of the Bankruptcy Act 1966) is a binding arrangement in which you pay creditors an affordable percentage of your debt over time through a registered debt agreement administrator. To be eligible you must be insolvent, and your unsecured debts, assets and expected after-tax income must all fall under indexed thresholds — check AFSA’s indexed amounts page for current figures. You are not eligible if you have been bankrupt, or had a debt agreement or personal insolvency agreement, in the last 10 years. Proposing a debt agreement is itself an act of bankruptcy.

What is a personal insolvency agreement (PIA)?

A personal insolvency agreement (Part X of the Bankruptcy Act 1966) is a legally binding agreement to settle debts without bankruptcy, usually by instalments or a lump sum. A trustee takes control of your property and puts the offer to creditors. There are no debt, asset or income limits. Two consequences matter for directors: entering a PIA is an act of bankruptcy, and you cannot manage a corporation until the terms of the agreement have been finalised. Your details also appear on the National Personal Insolvency Index permanently.

Can I transfer assets to my spouse or family before bankruptcy?

Do not do it. The Bankruptcy Act 1966 contains clawback provisions that allow a trustee to recover property transferred for less than its value, or transferred to defeat creditors — in some cases with no time limit. Shifting assets can also amount to an offence. If you are worried about your home or savings, get honest professional advice instead; there are lawful ways to negotiate and protect what can be protected.

Talk it through — confidentially

If company debt is starting to feel personal, the most useful thing you can do tonight is get the full picture: what you actually owe, what is genuinely enforceable against you, and which rungs of the ladder are realistically open. Directors work through this every week — and there are more rungs between pressure and bankruptcy than the 2am version of events suggests.

Call 0468 061 936 for a confidential, no-obligation conversation about how your company and personal positions fit together, or send the details through our enquiry form and we will come back to you promptly, and always confidentially. Where your situation calls for an AFSA-regulated trustee or administrator, or a solicitor, we will say so plainly and point you to the right practitioner.

Sources: AFSA — What is bankruptcy? · AFSA — Consequences of bankruptcy · AFSA — What is a debt agreement? · AFSA — Consequences of a debt agreement · AFSA — What is a personal insolvency agreement? · AFSA — Consequences of a PIA · AFSA — Personal bankruptcy and the liquidation of a company (joint AFSA/ASIC/ARITA guidance) · AFSA — Bankruptcy notice · AFSA — Make someone bankrupt · AFSA — Indexed amounts · Bankruptcy Act 1966 (legislation.gov.au) · Corporations Act 2001 (legislation.gov.au)

This page is general information only, not legal or financial advice. Personal insolvency decisions have long-lasting consequences that turn on your specific debts, assets, income and family circumstances. Seek advice from a qualified professional — and, for personal insolvency processes, an AFSA-regulated practitioner — about your own circumstances before acting. Restructure Partners does not administer personal insolvency arrangements or perform formal insolvency appointments; these are carried out by AFSA-regulated trustees and administrators, and by ASIC-registered practitioners for companies. Free financial counselling is available through the National Debt Helpline on 1800 007 007.