A large number of Australians experience financial difficulties during their lifetime, and this is mainly considered a normal fluctuation in our finances. But what if you’re unable to resolve these issues yourself, but at the same time, you don’t want to declare bankruptcy?
Debt consolidation loans are a common solution that relieves individuals of financial anxiety by consolidating all their current debts into one easy to manage loan that’s payable each month. Conversely, debt agreements are another approach available to people 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 financial institutions which comprises Part IX of the Bankruptcy Act 1966. Under this agreement, your financial institutions allow you to pay off a sum of money that you can manage, over an arranged time period, 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 consequences which may impact your capacity to secure credit in the future. Subsequently, it’s strongly encouraged that individuals seek independent financial guidance before making this decision to make sure this is the best alternative for their financial situation and they clearly recognise the implications of such agreements.
Before entering a debt agreement
There are a number of things one should consider before entering into a debt agreement. Talking with your financial institutions about your financial circumstance is always the first step you should take to try to resolve your debts outside of a debt agreement. Have you spoken with your creditors and asked them for extra time to repay your debt? Have you already attempted to work out 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 unable to pay unsecured debts. Not all kinds 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, creditors can request that your partner repays the full amount if you’re unable to
- Offshore debt
- Other debts – for instance debts incurred by fraud, child support, student HECS or HELP debts, and court fines
Are you entitled to enter a debt agreement?
To check if you are qualified, 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 decide that a debt agreement is the best choice for you, a debt agreement administrator will help 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 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 as a result, there are serious implications one must take into account.
- If your lenders turn down 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 mentioned on your credit report for up to five years, or longer in some situations
- You are legally required to advise 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 obliged to disclose your debt agreement to anybody who deals with your company.
- If your job belongs to a regulated profession or a position of trust, it may affect your employment.
Choose your debt agreement administrator carefully.
Debt agreement administrators play an integral role in the success of your debt agreement, so always opt for an administrator that is registered with AFSA’s list of registered debt agreement administrators. Fees also fluctuate widely between administrators, so always look into the payment terms before making any decisions.
If you’re still unsure if a debt agreement is the right option for you, speak with Bankruptcy Experts Mildura on 1300 795 575 who can give you the right advice, the first time. To learn more, visit www.bankruptcyexpertsmildura.com.au.