A lot of Australians encounter financial troubles during their lifetime, and this is often 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 declare bankruptcy?
Debt consolidation loans are a customary solution that relieves people of financial strain by consolidating all their current debts into one easy to manage loan that’s payable monthly. 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 fundamentally a legal contract between you and your creditors which comprises Part IX of the Bankruptcy Act 1966. Under this agreement, your lenders allow you to pay off a sum of money that you can afford, over an arranged time frame, 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 repercussions which may have a bearing on your capacity to acquire credit in the future. For this reason, it’s strongly encouraged that people seek independent financial advice before making this decision to ensure this is the best alternative for their financial circumstances and they clearly recognise the repercussions of such agreements.
Prior to entering a debt agreement
There are certain things one should consider before entering into a debt agreement. Speaking with your financial institutions about your financial situation is always the first step you should take to try to clear up your debts outside of a debt agreement. Have you talked to your lenders and asked them for extra time to repay your debt? Have you already tried to arrange 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 help low income earners who are unable to pay unsecured debts. Not all types 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 a partner, creditors can request that your partner repays the full amount if you’re unable to
- Overseas 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 determine 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 decide that a debt agreement is the best answer 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 agree to the terms of your agreement, then your debt agreement will begin, for instance, paying 75% of your debts to financial institutions over a 3-year time period.
Disadvantages of debt agreements
As stated earlier, debt agreements are an ‘act of bankruptcy’ and consequently there are severe implications one must consider.
- 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 detailed on your credit report for up to five years, or longer in some circumstances
- You are legally required to notify a new financial institution of your debt agreement when securing 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 individual who deals with your business.
- If your job belongs to a regulated profession or a position of trust, it may affect your employment.
Decide on your debt agreement administrator cautiously.
Debt agreement administrators play a key role in the results of your debt agreement, so always go with 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, reach out to Bankruptcy Experts Kalgoorlie on 1300 795 575 who can give you the right advice, the first time. To read more, visit www.bankruptcyexpertskalgoorlie.com.au.