A large number of Australians suffer through financial difficulties during their lifetime, and this is often considered a standard fluctuation in our finances. But what if you’re not able to address these problems yourself, but at the same time, you don’t want to file for bankruptcy?
Debt consolidation loans are a customary solution that relieves individuals of financial stress by consolidating all their current debts into one easy to manage loan that’s payable each month. Alternatively, debt agreements are another solution 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 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 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 impact your capacity to secure credit in the future. Subsequently, it’s strongly encouraged that individuals seek independent financial counselling before making this decision to ensure this is the best choice for their financial circumstances and they clearly recognise the implications of such agreements.
Prior to entering a debt agreement
There are specific things one should consider prior to entering into a debt agreement. Speaking to your financial institutions about your financial predicament is always the first step you should take to try to settle your debts outside of a debt agreement. Have you talked with your creditors and asked them for additional time to settle your debt? Have you already attempted to work out 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 assist 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 – for example home mortgages where the property can be sold to recoup money
- Joint debt – if you have a joint debt with an associate, lenders can request that your partner repays the full amount if you’re unable to
- Offshore debt
- Other debts – such as debts incurred by court fines, child support, fraud, and student HECS or HELP debts
Are you entitled 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 assist you with your debt agreement proposals, based on 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 commence, for example, paying 75% of your debts to creditors over a 3-year time period.
Disadvantages of debt agreements
As explained earlier, debt agreements are an ‘act of bankruptcy’ and consequently there are significant implications one must take into consideration.
- If your creditors 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 noted on your credit report for up to five years, or longer in some situations
- You are legally obliged to inform a new financial institution of your debt agreement when receiving a loan over $5,703.
- If you own a firm trading under another name, you are legally required to disclose your debt agreement to any individual who deals with your business.
- If your job belongs to a regulated profession or a position of trust, it may have a bearing on your employment.
Decide on your debt agreement administrator cautiously.
Debt agreement administrators play an important 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 read the payment terms before making any decisions.
If you’re still unclear if a debt agreement is the right alternative for you, call Bankruptcy Melbourne on 1300 879 867 who can give you the right advice, the first time. For additional information, visit www.bankruptcymelbourne.com.