Most Australians suffer through financial headaches during their lifetime, and this is often regarded as a normal fluctuation in our finances. But what if you’re unable to address these challenges 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 each month. Likewise, debt agreements are another approach 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 essentially 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 pay back a sum of money that you can manage, 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 repercussions which may have an effect on your ability to receive credit down the road. As a result, it’s strongly recommended that people seek independent financial guidance before making this decision to ensure this is the best approach for their financial circumstances and they clearly recognise the repercussions of such agreements.
Prior to entering a debt agreement
There are several things one should think about prior to entering into a debt agreement. Reaching out to your creditors 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 spoken with your creditors and asked them for more time to repay your debt? Have you already attempted to arrange 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 assist low income earners who are not able to pay unsecured debts. Not all kinds of debt are covered in debt agreements, including the following:
- Secured debt – for instance home loans 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
- Overseas debt
- Other debts – for example debts incurred by court fines, child support, fraud, and student HECS or HELP debts
Are you entitled to enter a debt agreement?
To determine 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 approach for you, a debt agreement administrator will assist you with your debt agreement proposals, based upon what you can afford, and deliver this proposal to each of your creditors. If your financial institutions agree to the terms of your agreement, then your debt agreement will start, for instance, paying 75% of your debts to financial institutions over a 3-year period.
Downsides of debt agreements
As explained earlier, debt agreements are an ‘act of bankruptcy’ and consequently there are severe implications one must take into account.
- 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 recorded on your credit report for up to five years, or longer in some circumstances
- You are legally required to inform a new creditor of your debt agreement when securing a loan over $5,703.
- If you own a firm 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 a bearing on your employment.
Decide on your debt agreement administrator mindfully.
Debt agreement administrators play an integral role in the success of your debt agreement, so always opt for an administrator that is registered with AFSA’s list of registered debt agreement administrators. Costs also vary widely between administrators, so always examine the payment terms prior to making any decisions.
If you’re still not sure if a debt agreement is the right approach for you, speak with Bankruptcy Experts Shepparton on 1300 795 575 who can give you the right advice, the first time. To find out more, visit www.bankruptcyexpertsshepparton.com.au.