Most Australians experience financial problems during their lifetime, and this is generally regarded as a typical 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 file for bankruptcy?
Debt consolidation loans are a popular solution that relieves individuals of financial anxiety by consolidating all their current debts into one easy to manage loan that’s payable each month. On the other hand, debt agreements are another solution 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 creditors which constitutes Part IX of the Bankruptcy Act 1966. Under this agreement, your financial institutions allow you to repay a sum of money that you can manage, over an arranged time period, to settle your debts.
It’s important 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. As a result, it’s strongly recommended that people seek independent financial advice before making this decision to make sure this is the best solution for their financial situation and they clearly understand the repercussions of such agreements.
Prior to entering a debt agreement
There are several things one should contemplate before entering into a debt agreement. Reaching out to your lenders about your financial situation is always the first step you should take to try to resolve your debts outside of a debt agreement. Have you talked to your creditors and asked them for additional time to repay your debt? Have you already tried to arrange 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 help low income earners who are unable to pay unsecured debts. Not all types of debt are covered in debt agreements, including 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 an associate, lenders can demand that your partner repays the full amount if you’re unable to
- Overseas debt
- Other debts – such as debts incurred by fraud, student HECS or HELP debts, court fines, and child support
Are you entitled to enter a debt agreement?
To find out if you are eligible, 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 solution 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 lenders. If your financial institutions accept the terms of your agreement, then your debt agreement will commence, for example, paying 90% of your debts to lenders over a 3-year period.
Downsides of debt agreements
As mentioned earlier, debt agreements are an ‘act of bankruptcy’ and as a result, there are serious implications one must take into account.
- 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 detailed on your credit report for up to five years, or longer in some circumstances
- You are legally obliged to advise a new creditor of your debt agreement when acquiring a loan over $5,703.
- If you own a business trading under another name, you are legally obliged to disclose your debt agreement to any individual who deals with your firm.
- If your job belongs to a regulated profession or a position of trust, it may have an effect on your employment.
Select your debt agreement administrator cautiously.
Debt agreement administrators play an important 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. Prices also vary widely between administrators, so always inspect the payment terms prior to making any decisions.
If you’re still unsure if a debt agreement is the right option for you, reach out to Bankruptcy Experts Coffs Harbour on 1300 795 575 who can give you the right advice, the first time. For more details, visit www.bankruptcyexpertscoffsharbour.com.au.