Many Australians encounter financial problems during their lifetime, and this is generally considered a typical fluctuation in our finances. But what if you’re unable to work through these challenges yourself, but at the same time, you don’t want to file for bankruptcy?
Debt consolidation loans are a customary solution that relieves individuals of financial stress 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 option 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 lenders which comprises Part IX of the Bankruptcy Act 1966. Under this agreement, your lenders allow you to pay off a sum of money that you can afford, over an agreed period of time, 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 ability to obtain credit down the road. As a result, it’s strongly recommended that folks seek independent financial advice before making this decision to make sure this is the best alternative for their financial situation and they clearly recognise the repercussions of such agreements.
Before entering a debt agreement
There are certain things one should take into account before entering into a debt agreement. Speaking with your financial institutions about your financial predicament is always the first step you should take to try to clear up your debts outside of a debt agreement. Have you talked to your creditors and asked them for extra time to repay your debt? Have you already attempted to arrange 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 assist low income earners who are unable 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 an associate, lenders can demand that your partner repays the full amount if you’re unable to
- Foreign debt
- Other debts – such as debts incurred by fraud, court fines, student HECS or HELP debts, and child support
Are you eligible to enter a debt agreement?
To discover 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 alternative for you, a debt agreement administrator will assist you with your debt agreement proposals, based on 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 example, paying 85% of your debts to creditors over a 3-year period.
Disadvantages of debt agreements
As stated earlier, debt agreements are an ‘act of bankruptcy’ and as a result, there are severe implications one must contemplate.
- If your financial institutions reject 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 detailed on your credit report for up to five years, or longer in some circumstances
- You are legally required to alert a new lender 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 individual who deals with your business.
- If your job belongs to a regulated profession or a position of trust, it may have a bearing on your employment.
Choose your debt agreement administrator cautiously.
Debt agreement administrators play a key 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. Fees also vary widely between administrators, so always read the payment terms prior to making any decisions.
If you’re still unsure if a debt agreement is the right solution for you, get in touch with Bankruptcy Experts Bunbury on 1300 795 575 who can give you the right advice, the first time. To learn more, visit www.bankruptcyexpertsbunbury.com.au.