A large number of Australians experience financial headaches during their lifetime, and this is often considered a normal fluctuation in our finances. But what if you’re unable to resolve these troubles yourself, but at the same time, you don’t want to declare bankruptcy?
Debt consolidation loans are a popular option that relieves individuals of financial anxiety by consolidating all their current debts into one easy to manage loan that’s payable each month. On the other hand, debt agreements are another approach 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 fundamentally a legal contract between you and your creditors which comprises Part IX of the Bankruptcy Act 1966. Under this agreement, your creditors allow you to pay off a sum of money that you can afford, over an arranged time frame, 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 consequences which may impact your capacity to secure credit in the future. For this reason, it’s strongly encouraged that individuals seek independent financial advice before making this decision to make sure this is the best approach for their financial circumstances and they clearly recognise the implications of such agreements.
Before entering a debt agreement
There are specific things one should consider before entering into a debt agreement. Talking to your creditors about your financial predicament is always the first step you should take to try to work out your debts outside of a debt agreement. Have you spoken to your financial institutions and asked them for more time to repay your debt? Have you already attempted to arrange a repayment plan or a smaller payment to repay your debt?
What kinds of debts are included in debt agreements?
Debt agreements are designed to assist low income earners who are not able to pay unsecured debts. Not all kinds of debt are covered in debt agreements, including 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 a partner, creditors can request that your partner repays the full amount if you’re unable to
- Offshore debt
- Other debts – for instance debts incurred by fraud, student HECS or HELP debts, court fines, and child support
Are you entitled to enter a debt agreement?
To check if you are qualified, 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 decide that a debt agreement is the best choice for you, a debt agreement administrator will help you with your debt agreement proposals, based on what you can afford, and send this proposal to each of your financial institutions. If your financial institutions accept the terms of your agreement, then your debt agreement will commence, for instance, paying 75% of your debts to financial institutions over a 3-year period.
Disadvantages of debt agreements
As mentioned earlier, debt agreements are an ‘act of bankruptcy’ and as a result, there are severe repercussions one must keep in mind.
- If your financial institutions refuse 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 circumstances
- You are legally obliged to notify a new financial institution of your debt agreement when acquiring a loan over $5,703.
- If you own a business trading under another name, you are legally required to reveal your debt agreement to any person who deals with your firm.
- If your job belongs to a regulated profession or a position of trust, it may have a bearing on your employment.
Decide on your debt agreement administrator mindfully.
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. Costs also fluctuate widely between administrators, so always look at the payment terms before making any decisions.
If you’re still unsure if a debt agreement is the right approach for you, get in touch with Bankruptcy Advice Perth on 1300 879 867 who can give you the right advice, the first time. For more details, visit www.bankruptcy-advice.com.au/perth.