Many Australians encounter financial challenges during their lifetime, and this is often regarded as a typical fluctuation in our finances. But what if you’re not able to resolve these issues yourself, but at the same time, you don’t want to declare bankruptcy?
Debt consolidation loans are a customary option that relieves people of financial pressure by consolidating all their current debts into one easy to manage loan that’s payable every month. On the contrary, debt agreements are another possibility 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 constitutes Part IX of the Bankruptcy Act 1966. Under this agreement, your creditors allow you to repay a sum of money that you can afford, over an agreed time frame, 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 implications which may have an effect on your capacity to acquire credit down the track. Subsequently, it’s strongly encouraged that folks seek independent financial advice before making this decision to ensure this is the best choice for their financial situation and they clearly understand the implications 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 financial institutions 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 to your lenders and asked them for extra time to settle your debt? Have you already attempted to discuss a repayment plan or a smaller payment to settle your debt?
What types of debts are covered in debt agreements?
Debt agreements are designed to help low income earners who are not able to pay unsecured debts. Not all types 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 a partner, lenders can demand that your partner repays the full amount if you’re unable to
- Foreign debt
- Other debts – including debts incurred by fraud, student HECS or HELP debts, court fines, and child support
Are you eligible to enter a debt agreement?
To ascertain 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 elect that a debt agreement is the best option for you, a debt agreement administrator will assist you with your debt agreement proposals, based on what you can afford, and deliver this proposal to each of your creditors. If your lenders accept the terms of your agreement, then your debt agreement will commence, for example, paying 85% of your debts to creditors over a 3-year time frame.
Downsides of debt agreements
As stated earlier, debt agreements are an ‘act of bankruptcy’ and as a result, there are significant repercussions one must take into consideration.
- If your lenders 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 mentioned on your credit report for up to five years, or longer in some situations
- You are legally obliged to inform a new creditor of your debt agreement when acquiring a loan over $5,703.
- If you own a business trading under another name, you are legally obliged to disclose your debt agreement to any person who deals with your business.
- If your job belongs to a regulated profession or a position of trust, it may affect your employment.
Choose your debt agreement administrator carefully.
Debt agreement administrators play an important role in the success of your debt agreement, so always go with an administrator that is registered with AFSA’s list of registered debt agreement administrators. Prices also fluctuate widely between administrators, so always check the payment terms before making any decisions.
If you’re still unsure if a debt agreement is the right alternative for you, call Bankruptcy Experts Dubbo on 1300 795 575 who can give you the right advice, the first time. To learn more, visit www.bankruptcyexpertsdubbo.com.au.