A large number of Australians go through financial challenges during their lifetime, and this is largely regarded as a normal fluctuation in our finances. But what if you’re unable to address these issues yourself, but at the same time, you don’t want to declare bankruptcy?
Debt consolidation loans are a common solution that relieves people of financial pressure by consolidating all their current debts into one easy to manage loan that’s payable monthly. On the contrary, debt agreements are another solution available to people 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 comprises Part IX of the Bankruptcy Act 1966. Under this agreement, your lenders allow you to repay a sum of money that you can manage, over an agreed time frame, to settle your debts.
It is necessary to note, however, that entering a debt agreement is an ‘act of bankruptcy’ and has long-term financial repercussions which may have a bearing on your capacity to obtain credit down the road. Consequently, it’s strongly encouraged that people seek independent financial counselling before making this decision to make sure this is the best alternative for their financial circumstances and they clearly understand the implications of such agreements.
Prior to entering a debt agreement
There are certain things one should take into account prior to entering into a debt agreement. Speaking to your lenders about your financial position is always the first step you should take to try to settle your debts outside of a debt agreement. Have you talked to your lenders and asked them for more time to settle your debt? Have you already attempted to discuss a repayment plan or a smaller payment to settle 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, such as the following:
- Secured debt – such as home mortgages where the property can be sold to recoup money
- Joint debt – if you have a joint debt with your partner, financial institutions can request that your partner repays the full amount if you’re unable to
- Offshore debt
- Other debts – for example debts incurred by fraud, court fines, student HECS or HELP debts, and child support
Are you entitled to enter a debt agreement?
To determine if you are qualified, 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 determine that a debt agreement is the best option 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 lenders. If your financial institutions accept the terms of your agreement, then your debt agreement will start, for instance, paying 85% of your debts to financial institutions over a 3-year time frame.
Downsides of debt agreements
As mentioned earlier, debt agreements are an ‘act of bankruptcy’ and as a result, there are serious repercussions one must keep in mind.
- If your financial institutions 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 acquiring a loan over $5,703.
- If you own an enterprise trading under another name, you are legally obliged to reveal your debt agreement to anyone who deals with your enterprise.
- If your job belongs to a regulated profession or a position of trust, it may affect your employment.
Choose your debt agreement administrator mindfully.
Debt agreement administrators play an important role in the results of your debt agreement, so always opt for an administrator that is registered with AFSA’s list of registered debt agreement administrators. Prices also fluctuate widely between administrators, so always look at the payment terms before making any decisions.
If you’re still unclear if a debt agreement is the right alternative for you, get in touch with Bankruptcy Experts on 1300 795 575 who can give you the right advice, the first time. To find out more, visit www.bankruptcyexperts.com.au.