Many Australians go through financial challenges during their lifetime, and this is mainly regarded as a standard fluctuation in our finances. But what if you’re unable to resolve these problems yourself, but at the same time, you don’t want to file for bankruptcy?
Debt consolidation loans are a standard option that relieves folks of financial strain by consolidating all their current debts into one easy to manage loan that’s payable each month. On the other hand, debt agreements are another option 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 effectively a legal contract between you and your financial institutions 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 period of time, to settle your debts.
It’s important to note, however, that entering a debt agreement is an ‘act of bankruptcy’ and has long-term financial implications which may have a bearing on your capacity to acquire credit in the future. Consequently, it’s strongly recommended that people seek independent financial advice before making this decision to make sure this is the best option for their financial circumstances and they clearly recognise the implications of such agreements.
Prior to entering a debt agreement
There are a number of things one should take into consideration before entering into a debt agreement. Speaking to your lenders about your financial situation is always the first step you should take to try to settle your debts outside of a debt agreement. Have you talked with 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 repay your debt?
What kinds of debts are included in debt agreements?
Debt agreements are designed to help low income earners who are not able to pay unsecured debts. Not all types of debt are covered in debt agreements, such as the following:
- Secured debt – such as home mortgages where the property can be sold to recover money
- Joint debt – if you have a joint debt with your partner, lenders can demand that your partner repays the full amount if you’re unable to
- Foreign 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 figure out 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 determine that a debt agreement is the best alternative 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 lenders accept the terms of your agreement, then your debt agreement will start, for instance, paying 90% of your debts to creditors over a 3-year time period.
Downsides of debt agreements
As mentioned earlier, debt agreements are an ‘act of bankruptcy’ and consequently there are serious repercussions one must consider.
- 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 noted on your credit report for up to five years, or longer in some circumstances
- You are legally required to alert a new financial institution of your debt agreement when obtaining a loan over $5,703.
- If you own a business trading under another name, you are legally obliged to disclose your debt agreement to anyone who deals with your firm.
- If your job belongs to a regulated profession or a position of trust, it may affect your employment.
Select your debt agreement administrator cautiously.
Debt agreement administrators play an integral role in the success of your debt agreement, so always go with an administrator that is registered with AFSA’s list of registered debt agreement administrators. Fees 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 alternative for you, speak with Bankruptcy Experts Wangaratta on 1300 795 575 who can give you the right advice, the first time. To learn more, visit www.bankruptcyexpertswangaratta.com.au.