A large number of Australians suffer through financial headaches during their lifetime, and this is generally considered a typical fluctuation in our finances. But what if you’re unable to work through these troubles yourself, but at the same time, you don’t want to file for bankruptcy?
Debt consolidation loans are a common option that relieves folks of financial anxiety by consolidating all their current debts into one easy to manage loan that’s payable every month. Moreover, 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 fundamentally 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 pay off a sum of money that you can afford, over an arranged period of time, to settle your debts.
It is necessary 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 capacity to acquire credit down the road. Subsequently, it’s strongly encouraged that folks seek independent financial advice 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 specific things one should contemplate before entering into a debt agreement. Speaking with your lenders 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 talked with your lenders and asked them for extra time to settle your debt? Have you already tried to discuss a repayment plan or a smaller payment to repay your debt?
What types of debts are covered in debt agreements?
Debt agreements are designed to help 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 mortgages where the property can be sold to recover 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 – for instance debts incurred by child support, student HECS debts, court fines, and fraud
Are you eligible to enter a debt agreement?
To find 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 determine that a debt agreement is the best solution for you, a debt agreement administrator will help you with your debt agreement proposals, based upon what you can afford, and send 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 75% of your debts to financial institutions over a 3-year time frame.
Drawbacks of debt agreements
As stated earlier, debt agreements are an ‘act of bankruptcy’ and consequently there are serious implications one must keep in mind.
- If your lenders 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 situations
- You are legally required to alert a new lender 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 person 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.
Select your debt agreement administrator diligently.
Debt agreement administrators play an integral 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 look into the payment terms before making any decisions.
If you’re still unclear if a debt agreement is the right approach for you, talk with Bankruptcy Experts Whitsundays on 1300 795 575 who can give you the right advice, the first time. For more information, visit www.bankruptcyexpertswhitsundays.com.au.