A large number of Australians encounter financial issues during their lifetime, and this is mainly regarded as a typical fluctuation in our finances. But what if you’re not able to resolve these difficulties 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 pressure by consolidating all their current debts into one easy to manage loan that’s payable every month. Likewise, debt agreements are another solution available to people in financial hardship, 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 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 afford, over an arranged 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 obtain credit down the track. Subsequently, it’s strongly recommended that individuals seek independent financial counselling before making this decision to make sure this is the best approach for their financial circumstances and they clearly grasp the implications of such agreements.
Before entering a debt agreement
There are several things one should take into account before entering into a debt agreement. Speaking to your lenders about your financial predicament 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 financial institutions and asked them for extra time to settle your debt? Have you already tried 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 assist 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 an associate, lenders can demand that your partner repays the full amount if you’re unable to
- Foreign debt
- Other debts – including debts incurred by fraud, court fines, student HECS or HELP debts, and child support
Are you eligible to enter a debt agreement?
To ascertain if you are eligible, 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 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 creditors accept the terms of your agreement, then your debt agreement will begin, for instance, paying 90% of your debts to lenders over a 3-year time period.
Disadvantages of debt agreements
As mentioned earlier, debt agreements are an ‘act of bankruptcy’ and as a result, there are significant repercussions one must consider.
- If your creditors 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 listed on your credit report for up to five years, or longer in some circumstances
- You are legally obliged to advise a new financial institution of your debt agreement when acquiring a loan over $5,703.
- If you own a firm trading under another name, you are legally obliged to reveal 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.
Select your debt agreement administrator diligently.
Debt agreement administrators play an integral role in the results of your debt agreement, so always go with an administrator that is registered with AFSA’s list of registered debt agreement administrators. Prices also vary widely between administrators, so always look at the payment terms prior to making any decisions.
If you’re still uncertain if a debt agreement is the right option for you, speak to Bankruptcy Experts Port Macquarie on 1300 795 575 who can give you the right advice, the first time. For more information, visit www.bankruptcyexpertsportmacquarie.com.au.