Most Australians wrestle with financial issues during their lifetime, and this is generally considered a standard fluctuation in our finances. But what if you’re not able to resolve these problems yourself, but at the same time, you don’t want to file for bankruptcy?
Debt consolidation loans are a common solution that relieves individuals of financial stress by consolidating all their current debts into one easy to manage loan that’s payable each month. On the contrary, 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 lenders which constitutes Part IX of the Bankruptcy Act 1966. Under this agreement, your lenders allow you to pay back a sum of money that you can manage, over an agreed time period, to settle your debts.
It is vital to note, however, that entering a debt agreement is an ‘act of bankruptcy’ and has long-term financial repercussions which may affect your ability to receive credit down the track. As a result, it’s strongly recommended that people seek independent financial counselling before making this decision to ensure this is the best approach for their financial circumstances and they clearly recognise the repercussions of such agreements.
Before entering a debt agreement
There are specific things one should take into account prior to entering into a debt agreement. Reaching out to your financial institutions 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 to your lenders and asked them for additional 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 included in debt agreements?
Debt agreements are designed to assist low income earners who are unable to pay unsecured debts. Not all kinds of debt are covered in debt agreements, including the following:
- Secured debt – for example home loans where the property can be sold to recover money
- Joint debt – if you have a joint debt with a partner, creditors can demand that your partner repays the full amount if you’re unable to
- Offshore debt
- Other debts – including debts incurred by fraud, court fines, student HECS or HELP debts, and child support
Are you entitled to enter a debt agreement?
To check 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 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 creditors accept the terms of your agreement, then your debt agreement will commence, for example, paying 75% of your debts to lenders over a 3-year time frame.
Disadvantages of debt agreements
As mentioned earlier, debt agreements are an ‘act of bankruptcy’ and as a result, there are significant repercussions one must consider.
- If your financial institutions 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 shown on your credit report for up to five years, or longer in some circumstances
- You are legally required to notify a new lender of your debt agreement when acquiring a loan over $5,703.
- If you own a business trading under another name, you are legally required to disclose your debt agreement to anybody who deals with your business.
- If your job belongs to a regulated profession or a position of trust, it may affect your employment.
Select your debt agreement administrator mindfully.
Debt agreement administrators play a key role in the success of your debt agreement, so always choose an administrator that is registered with AFSA’s list of registered debt agreement administrators. Fees also fluctuate widely between administrators, so always inspect the payment terms prior to making any decisions.
If you’re still not sure if a debt agreement is the right alternative for you, talk with Bankruptcy Experts Gosford on 1300 795 575 who can give you the right advice, the first time. For more information, visit www.bankruptcyexpertsgosford.com.au.