A large number of Australians experience financial troubles during their lifetime, and this is generally considered a normal fluctuation in our finances. But what if you’re unable to resolve these difficulties yourself, but at the same time, you don’t want to file for bankruptcy?
Debt consolidation loans are a common solution that relieves individuals of financial strain by consolidating all their current debts into one easy to manage loan that’s payable monthly. Moreover, debt agreements are another solution 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 essentially a legal contract between you and your financial institutions which constitutes Part IX of the Bankruptcy Act 1966. Under this agreement, your creditors allow you to pay back a sum of money that you can afford, over an agreed period of time, to settle your debts.
It is vital to note, however, that entering a debt agreement is an ‘act of bankruptcy’ and has long-term financial consequences which may have an effect on your capacity to acquire credit down the road. Consequently, it’s strongly encouraged that individuals seek independent financial counselling before making this decision to ensure this is the best alternative for their financial situation and they clearly understand the implications of such agreements.
Before entering a debt agreement
There are a number of things one should take into consideration prior to entering into a debt agreement. Talking with your creditors about your financial position is always the first step you should take to try to resolve your debts outside of a debt agreement. Have you spoken with your financial institutions and asked them for additional time to repay your debt? Have you already tried to discuss a repayment plan or a smaller payment to repay your debt?
What kinds of debts are covered in debt agreements?
Debt agreements are designed to help low income earners who are unable to pay unsecured debts. Not all kinds of debt are covered in debt agreements, such as the following:
- Secured debt – for instance mortgages where the property can be sold to recover money
- Joint debt – if you have a joint debt with your partner, creditors can demand that your partner repays the full amount if you’re unable to
- Overseas debt
- Other debts – for example debts incurred by court fines, child support, fraud, and student HECS or HELP debts
Are you entitled to enter a debt agreement?
To find out if you are eligible, simply 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 elect that a debt agreement is the best approach 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 lenders. If your lenders agree to the terms of your agreement, then your debt agreement will begin, for instance, paying 75% of your debts to financial institutions over a 3-year time frame.
Drawbacks of debt agreements
As explained earlier, debt agreements are an ‘act of bankruptcy’ and consequently there are severe repercussions one must consider.
- If your lenders reject 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 noted on your credit report for up to five years, or longer in some situations
- You are legally obliged to notify a new lender of your debt agreement when receiving a loan over $5,703.
- If you own a business trading under another name, you are legally required to disclose your debt agreement to any individual who deals with your enterprise.
- If your job belongs to a regulated profession or a position of trust, it may have a bearing on your employment.
Choose your debt agreement administrator cautiously.
Debt agreement administrators play a vital role in the results of your debt agreement, so always go with an administrator that is registered with AFSA’s list of registered debt agreement administrators. Prices also vary widely between administrators, so always review the payment terms before making any decisions.
If you’re still uncertain if a debt agreement is the right solution for you, get in contact with Bankruptcy Advice on 1300 879 867 who can give you the right advice, the first time. To learn more, visit www.bankruptcy-advice.com.au/.