Most Australians deal with financial problems during their lifetime, and this is mainly regarded as a standard fluctuation in our finances. But what if you’re not able to resolve these problems yourself, but at the same time, you don’t want to declare bankruptcy?
Debt consolidation loans are a popular solution that relieves individuals of financial stress by consolidating all their current debts into one easy to manage loan that’s payable every month. On the contrary, debt agreements are another option available to individuals in financial hardship, and this will be the focus of today’s article.
What is a debt agreement?
A debt agreement is effectively a legal contract between you and your financial institutions which comprises Part IX of the Bankruptcy Act 1966. Under this agreement, your creditors allow you to pay back a sum of money that you can manage, over an arranged time period, to settle your debts.
It is crucial to note, however, that entering a debt agreement is an ‘act of bankruptcy’ and has long-term financial implications which may impact your ability to acquire credit down the track. As a result, it’s strongly recommended that folks seek independent financial counselling before making this decision to ensure this is the best choice for their financial circumstances and they clearly grasp the repercussions of such agreements.
Before entering a debt agreement
There are specific things one should take into consideration before entering into a debt agreement. Speaking to your lenders about your financial situation is always the first step you should take to try to work out your debts outside of a debt agreement. Have you talked with your creditors and asked them for more time to settle your debt? Have you already attempted to arrange a repayment plan or a smaller payment to settle your debt?
What types of debts are included in debt agreements?
Debt agreements are designed to help low income earners who are unable to pay unsecured debts. Not all types of debt are covered in debt agreements, such as the following:
- Secured debt – for example home mortgages where the property can be sold to recover money
- Joint debt – if you have a joint debt with an associate, lenders can request that your partner repays the full amount if you’re unable to
- Offshore debt
- Other debts – for example debts incurred by student HECS or HELP debts, fraud, child support, and court fines
Are you eligible to enter a debt agreement?
To figure out if you are eligible, just visit the Australian Financial Security Authority’s (AFSA) website (https://www.afsa.gov.au/insolvency/i-cant-pay-my-debts/am-i-eligible-debt-agreement).
If you determine that a debt agreement is the best choice for you, a debt agreement administrator will assist you with your debt agreement proposals, based upon what you can afford, and send this proposal to each of your financial institutions. If your lenders accept the terms of your agreement, then your debt agreement will begin, for example, paying 80% of your debts to lenders over a 3-year time frame.
Downsides of debt agreements
As explained earlier, debt agreements are an ‘act of bankruptcy’ and as a result, there are significant implications one must consider.
- If your creditors turn down your debt agreement proposal, they can make an application to the courts for involuntary bankruptcy
- Your name will appear on the National Personal Insolvency Index (NPII) for 5 years from the date of your agreement, or 2 years after the end date, whichever is later
- Your debt agreement will be listed on your credit report for up to five years, or longer in some situations
- You are legally required to alert a new lender of your debt agreement when securing a loan over $5,703.
- If you own a company trading under another name, you are legally required to reveal your debt agreement to anyone who deals with your company.
- If your job belongs to a regulated profession or a position of trust, it may have an effect on your employment.
Select your debt agreement administrator carefully.
Debt agreement administrators play an integral role in the success of your debt agreement, so always opt for an administrator that is registered with AFSA’s list of registered debt agreement administrators. Fees also vary widely between administrators, so always read the payment terms before making any decisions.
If you’re still unsure if a debt agreement is the right option for you, talk with Bankruptcy Advice Adelaide on 1300 879 867 who can give you the right advice, the first time. For more information, visit www.bankruptcy-advice.com.au/Adelaide.