Many Australians wrestle with financial problems during their lifetime, and this is mainly regarded as a typical fluctuation in our finances. But what if you’re not able to work out these challenges yourself, but at the same time, you don’t want to declare bankruptcy?
Debt consolidation loans are a common solution that relieves people 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 possibility 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 ultimately a legal contract between you and your financial institutions which comprises Part IX of the Bankruptcy Act 1966. Under this agreement, your creditors allow you to repay a sum of money that you can manage, 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 have an effect on your ability to receive credit in the future. Consequently, it’s strongly encouraged that people seek independent financial guidance before making this decision to make sure this is the best choice for their financial circumstances and they clearly grasp the consequences of such agreements.
Before entering a debt agreement
There are specific things one should think about before entering into a debt agreement. Speaking with your financial institutions about your financial condition is always the first step you should take to try to work out your debts outside of a debt agreement. Have you talked with your lenders and asked them for additional time to repay your debt? Have you already attempted to arrange a repayment plan or a smaller payment to repay 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 kinds of debt are covered in debt agreements, such as the following:
- Secured debt – such as mortgages where the property can be sold to recoup money
- Joint debt – if you have a joint debt with your partner, creditors can request that your partner repays the full amount if you’re unable to
- Offshore debt
- Other debts – including debts incurred by court fines, child support, fraud, and student HECS or HELP debts
Are you eligible to enter a debt agreement?
To ascertain if you are eligible, 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 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 financial institutions. If your financial institutions accept the terms of your agreement, then your debt agreement will begin, for instance, 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 implications one must keep in mind.
- 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 recorded on your credit report for up to five years, or longer in some situations
- You are legally required to alert a new financial institution 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 enterprise.
- 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 important role in the results of your debt agreement, so always opt for an administrator that is registered with AFSA’s list of registered debt agreement administrators. Prices also vary widely between administrators, so always inspect the payment terms prior to making any decisions.
If you’re still unsure if a debt agreement is the right alternative for you, phone Bankruptcy Experts Mackay on 1300 795 575 who can give you the right advice, the first time. For more information, visit www.bankruptcyexpertsmackay.com.au.