Many Australians wrestle with financial issues during their lifetime, and this is mainly considered a normal fluctuation in our finances. But what if you’re not able to work out these issues yourself, but at the same time, you don’t want to file for bankruptcy?
Debt consolidation loans are a standard solution that relieves folks of financial anxiety by consolidating all their current debts into one easy to manage loan that’s payable every month. Conversely, debt agreements are another solution available to individuals in financial distress, and this will be the focus of today’s article.
What is a debt agreement?
A debt agreement is basically 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 pay off a sum of money that you can afford, over an arranged time period, 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 affect your capacity to secure credit down the track. For this reason, 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 recognise the repercussions of such agreements.
Before entering a debt agreement
There are a number of things one should contemplate before entering into a debt agreement. Speaking with your lenders about your financial circumstance 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 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 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 types of debt are covered in debt agreements, including the following:
- Secured debt – such as home loans where the property can be sold to recover money
- Joint debt – if you have a joint debt with an associate, creditors can request that your partner repays the full amount if you’re unable to
- Foreign debt
- Other debts – such as debts incurred by fraud, student HECS or HELP debts, court fines, and child support
Are you entitled to enter a debt agreement?
To figure out 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 determine that a debt agreement is the best solution 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 creditors. If your creditors agree to the terms of your agreement, then your debt agreement will start, for instance, paying 80% of your debts to creditors over a 3-year period.
Downsides of debt agreements
As stated earlier, debt agreements are an ‘act of bankruptcy’ and consequently there are serious repercussions one must keep in mind.
- 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 inform a new lender of your debt agreement when securing 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 person who deals with your company.
- If your job belongs to a regulated profession or a position of trust, it may have an effect on your employment.
Choose your debt agreement administrator cautiously.
Debt agreement administrators play an integral role in the success of your debt agreement, so always decide on an administrator that is registered with AFSA’s list of registered debt agreement administrators. Costs also vary widely between administrators, so always check the payment terms prior to making any decisions.
If you’re still unclear if a debt agreement is the right option for you, talk to Bankruptcy Experts Shellharbour on 1300 795 575 who can give you the right advice, the first time. To read more, visit www.bankruptcyexpertsshellharbour.com.au.