Most Australians encounter financial troubles during their lifetime, and this is largely considered a typical fluctuation in our finances. But what if you’re not able to resolve these troubles yourself, but at the same time, you don’t want to declare bankruptcy?
Debt consolidation loans are a standard solution that relieves individuals of financial strain by consolidating all their current debts into one easy to manage loan that’s payable every month. On the other hand, debt agreements are another possibility available to people in financial distress, 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 lenders 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 implications which may affect your ability to acquire credit down the road. For this reason, it’s strongly recommended that folks seek independent financial counselling before making this decision to make sure this is the best choice for their financial situation and they clearly recognise the repercussions of such agreements.
Prior to entering a debt agreement
There are certain things one should consider prior to entering into a debt agreement. Talking with your lenders about your financial circumstance is always the first step you should take to try to clear up your debts outside of a debt agreement. Have you talked with your lenders and asked them for additional time to settle your debt? Have you already attempted to arrange 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 kinds of debt are covered in debt agreements, such as the following:
- Secured debt – for example mortgages where the property can be sold to recover money
- Joint debt – if you have a joint debt with your partner, financial institutions can demand that your partner repays the full amount if you’re unable to
- Offshore debt
- Other debts – for instance debts incurred by fraud, court fines, student HECS or HELP debts, and child support
Are you eligible to enter a debt agreement?
To figure out if you are qualified, 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 choice for you, a debt agreement administrator will help you with your debt agreement proposals, based on 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 begin, 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 serious implications one must take into consideration.
- 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 noted on your credit report for up to five years, or longer in some circumstances
- You are legally required to inform a new lender of your debt agreement when acquiring a loan over $5,703.
- If you own a company trading under another name, you are legally required to disclose your debt agreement to any individual who deals with your firm.
- If your job belongs to a regulated profession or a position of trust, it may have a bearing on your employment.
Select your debt agreement administrator carefully.
Debt agreement administrators play an important 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. Costs also vary widely between administrators, so always check the payment terms prior to making any decisions.
If you’re still not sure if a debt agreement is the right solution for you, contact Bankruptcy Experts Albury on 1300 795 575 who can give you the right advice, the first time. For more details, visit www.bankruptcyexpertsalbury.com.au.