Most Australians encounter financial headaches during their lifetime, and this is often regarded as a standard fluctuation in our finances. But what if you’re not able to work through these challenges 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. On the other hand, debt agreements are another option available to people in financial distress, 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 financial institutions allow you to repay a sum of money that you can afford, over an arranged time frame, to settle your debts.
It is essential 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 ability to obtain credit down the track. Consequently, it’s strongly recommended that individuals seek independent financial advice before making this decision to make sure this is the best option for their financial circumstances and they clearly understand the repercussions of such agreements.
Prior to entering a debt agreement
There are several things one should consider before entering into a debt agreement. Reaching out to your creditors about your financial position is always the first step you should take to try to work out your debts outside of a debt agreement. Have you spoken with your creditors and asked them for additional time to settle your debt? Have you already tried to work out a repayment plan or a smaller payment to repay your debt?
What types of debts are included in debt agreements?
Debt agreements are designed to help 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 – for instance home loans where the property can be sold to recover money
- Joint debt – if you have a joint debt with your partner, financial institutions can demand that your partner repays the full amount if you’re unable to
- Foreign debt
- Other debts – such as debts incurred by student HECS or HELP debts, fraud, child support, and court fines
Are you entitled to enter a debt agreement?
To ascertain 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 decide that a debt agreement is the best alternative 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 creditors accept the terms of your agreement, then your debt agreement will start, for example, paying 90% of your debts to creditors over a 3-year time frame.
Drawbacks of debt agreements
As stated earlier, debt agreements are an ‘act of bankruptcy’ and consequently there are severe repercussions one must contemplate.
- If your lenders 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 mentioned on your credit report for up to five years, or longer in some circumstances
- You are legally obliged to notify a new creditor of your debt agreement when acquiring a loan over $5,703.
- If you own a company trading under another name, you are legally obliged to disclose your debt agreement to anybody who deals with your business.
- If your job belongs to a regulated profession or a position of trust, it may affect your employment.
Decide on your debt agreement administrator carefully.
Debt agreement administrators play a vital role in the success of your debt agreement, so always choose an administrator that is registered with AFSA’s list of registered debt agreement administrators. Prices also vary widely between administrators, so always examine the payment terms prior to making any decisions.
If you’re still unsure if a debt agreement is the right alternative for you, contact Bankruptcy Australia on 1300 795 575 who can give you the right advice, the first time. For more details, visit www.bankruptcy-australia.net.au.