A lot of Australians experience financial troubles during their lifetime, and this is largely regarded as a typical fluctuation in our finances. But what if you’re not able to resolve these challenges yourself, but at the same time, you don’t want to declare bankruptcy?
Debt consolidation loans are a common solution that relieves folks of financial strain by consolidating all their current debts into one easy to manage loan that’s payable every month. On the contrary, 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 essentially a legal contract between you and your creditors which comprises Part IX of the Bankruptcy Act 1966. Under this agreement, your financial institutions allow you to pay back a sum of money that you can afford, over an arranged time frame, 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 repercussions which may have an effect on your ability to acquire credit down the road. For this reason, it’s strongly recommended that people seek independent financial counselling before making this decision to make sure this is the best solution for their financial situation and they clearly understand the repercussions of such agreements.
Before entering a debt agreement
There are certain things one should consider prior to entering into a debt agreement. Talking to your creditors about your financial circumstance 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 more time to repay your debt? Have you already attempted to work out a repayment plan or a smaller payment to repay your debt?
What kinds of debts are covered in debt agreements?
Debt agreements are designed to help 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 – 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 request that your partner repays the full amount if you’re unable to
- Offshore debt
- Other debts – for instance debts incurred by child support, student HECS debts, court fines, and fraud
Are you eligible to enter a debt agreement?
To determine 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 determine that a debt agreement is the best option 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 financial institutions. If your creditors agree to the terms of your agreement, then your debt agreement will commence, for example, paying 90% of your debts to lenders over a 3-year time period.
Disadvantages of debt agreements
As explained earlier, debt agreements are an ‘act of bankruptcy’ and as a result, there are severe implications one must take into account.
- If your financial institutions refuse 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 required to inform a new financial institution of your debt agreement when securing 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 business.
- If your job belongs to a regulated profession or a position of trust, it may have an effect on your employment.
Choose your debt agreement administrator mindfully.
Debt agreement administrators play a vital role in the results of your debt agreement, so always select an administrator that is registered with AFSA’s list of registered debt agreement administrators. Fees 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, get in touch with Bankruptcy Experts Taree on 1300 795 575 who can give you the right advice, the first time. To learn more, visit www.bankruptcyexpertstaree.com.au.