Many Australians experience financial challenges during their lifetime, and this is generally considered a natural fluctuation in our finances. But what if you’re unable to address these challenges yourself, but at the same time, you don’t want to file for bankruptcy?
Debt consolidation loans are a standard solution that relieves folks of financial stress by consolidating all their current debts into one easy to manage loan that’s payable every month. Likewise, 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 ultimately 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 off a sum of money that you can manage, over an agreed time period, to settle your debts.
It is essential 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 down the road. For this reason, it’s strongly recommended that individuals seek independent financial advice before making this decision to ensure 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 a number of things one should take into account prior to entering into a debt agreement. Speaking to your financial institutions about your financial position 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 financial institutions and asked them for extra time to repay your debt? Have you already attempted to negotiate 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, including the following:
- Secured debt – for example home mortgages where the property can be sold to recover money
- Joint debt – if you have a joint debt with an associate, creditors can request that your partner repays the full amount if you’re unable to
- Foreign debt
- Other debts – for example debts incurred by fraud, court fines, student HECS or HELP debts, and child support
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 determine that a debt agreement is the best alternative for you, a debt agreement administrator will help you with your debt agreement proposals, based on what you can afford, and send this proposal to each of your creditors. If your creditors agree to the terms of your agreement, then your debt agreement will start, for instance, paying 85% of your debts to creditors over a 3-year time period.
Disadvantages of debt agreements
As stated earlier, debt agreements are an ‘act of bankruptcy’ and as a result, there are significant repercussions one must contemplate.
- If your lenders 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 detailed on your credit report for up to five years, or longer in some situations
- You are legally obliged to inform a new lender of your debt agreement when receiving a loan over $5,703.
- If you own a business trading under another name, you are legally obliged to reveal your debt agreement to any person 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.
Select your debt agreement administrator mindfully.
Debt agreement administrators play an integral role in the results of your debt agreement, so always choose an administrator that is registered with AFSA’s list of registered debt agreement administrators. Costs also fluctuate widely between administrators, so always check the payment terms before making any decisions.
If you’re still uncertain if a debt agreement is the right solution for you, talk to Bankruptcy Experts Port Stephens on 1300 795 575 who can give you the right advice, the first time. For more details, visit www.bankruptcyexpertsportstephens.com.au.