Is it better to go bankrupt or negotiate with the ATO?
Short answer
For most people, negotiating comes first. A payment plan, interest remission or hardship release costs nothing, stays off the public record and keeps your assets and directorships. Bankruptcy only tends to make sense when the debt is far beyond what you could pay in any realistic period, other creditors are circling too, and you have little in assets or income to lose. Nobody can make that call for you, but the questions below usually settle it. Start with the bankruptcy guide.
When negotiating usually wins
The ATO says it will not seek to bankrupt someone who can clearly pay the debt in a reasonable time, and its tools for people who engage are broad:
- A payment plan, set up online for debts up to $200,000, or by phone above that.
- Remission of GIC, which can take a real slice off a debt that has been compounding at 11.43%.
- Release for serious hardship, for individuals and sole traders, covering income tax but not GST or PAYG withholding.
- Lodging late returns to replace a default assessment with the true figure.
If a plan over two or three years is affordable, or would be once interest is remitted, negotiation nearly always beats bankruptcy. You keep your home equity, your car above the protected limit, your credit file and your ability to run a company.
When bankruptcy enters the conversation
Bankruptcy starts to be a rational option, rather than a panic response, when several of these are true:
- The debt is a multiple of what you could pay over a few years, even with interest remitted.
- Most of it is GST or PAYG withholding, which hardship release cannot touch but bankruptcy can.
- The ATO has refused or cancelled plans and has served a bankruptcy notice, giving you 21 days.
- You have other unsecured debts that would also be released.
- You have little equity, modest income and no directorships to protect.
Even then, the middle ground is worth a look. A debt agreement or a personal insolvency agreement can bind the ATO to a partial payment without a full bankruptcy, if the ATO votes for it.
Deciding between bankruptcy and a deal?
Get the numbers laid out side by side before you choose. Free and confidential.
Five questions that usually settle it
- Is the debt yours, or your company's? Company debt is a liquidation or restructuring question, not a personal bankruptcy one.
- What could you honestly pay per month for three years, and how far short does it fall?
- How much of the debt is interest and penalties that could be remitted?
- What would you lose: home equity, a vehicle, half your income above the threshold, a directorship, five years of clean credit?
- Has the ATO actually started bankruptcy steps, or is that fear rather than fact? Can the ATO make me bankrupt explains the sequence.
GET INDEPENDENT ADVICE
Bankruptcy is a regulated decision with consequences that last years. A free financial counsellor or a registered trustee can lay out your numbers without selling you anything.
What to do next
- Work out the honest monthly figure you could pay for three years, and compare it with the debt after possible interest remission.
- Call the ATO on 13 11 42 or have your agent call, and ask what plan or remission is available before you assume the answer is no.
- If the numbers still do not work, speak to a free financial counsellor about a debt agreement, a personal insolvency agreement or bankruptcy.
Related questions
Will the ATO accept less than the full debt if I negotiate?
Sometimes, but rarely as a straight discount. The ATO remits interest and penalties more readily than it forgives primary tax, and a formal compromise of primary tax is uncommon. Through a debt agreement or personal insolvency agreement it will accept a partial return if that return is at least what bankruptcy would produce and your lodgements are up to date.
Does the ATO prefer a payment plan over making me bankrupt?
Generally yes. Bankruptcy is slow and costly for the ATO and often returns less than a kept payment plan. It pursues bankruptcy mainly where a person has stopped engaging, has assets worth pursuing, or has a history of broken plans and unlodged returns.
Deciding between bankruptcy and a deal?
Get the numbers laid out side by side before you choose. Free and confidential.
Get help nowMore questions: 16 Bankruptcy, liquidation and SBR questions questions answered · Full guide: Liquidation & ATO debt