A large number of Australians deal with financial challenges during their lifetime, and this is generally considered a typical 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 file for bankruptcy?
Debt consolidation loans are a standard option that relieves folks of financial anxiety by consolidating all their current debts into one easy to manage loan that’s payable every month. On the other hand, debt agreements are another solution available to individuals 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 creditors allow you to repay a sum of money that you can afford, over an agreed time frame, 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 repercussions which may affect your capacity to obtain credit down the road. Consequently, it’s strongly recommended that folks seek independent financial guidance before making this decision to make sure this is the best option for their financial circumstances and they clearly recognise the implications of such agreements.
Before entering a debt agreement
There are several things one should think about prior to entering into a debt agreement. Reaching out to your creditors 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 spoken with your financial institutions and asked them for extra time to repay your debt? Have you already tried to discuss 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 not able to pay unsecured debts. Not all kinds of debt are covered in debt agreements, including the following:
- Secured debt – for instance home mortgages 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 student HECS or HELP debts, fraud, child support, and court fines
Are you entitled to enter a debt agreement?
To discover 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 decide that a debt agreement is the best approach for you, a debt agreement administrator will assist you with your debt agreement proposals, based on what you can afford, and send this proposal to each of your lenders. If your creditors agree to the terms of your agreement, then your debt agreement will commence, for example, paying 80% of your debts to lenders over a 3-year period.
Disadvantages of debt agreements
As mentioned earlier, debt agreements are an ‘act of bankruptcy’ and as a result, there are significant implications one must take into account.
- 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 recorded on your credit report for up to five years, or longer in some circumstances
- You are legally obliged to advise a new lender of your debt agreement when obtaining a loan over $5,703.
- If you own a company trading under another name, you are legally required 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 vital role in the success of your debt agreement, so always decide on an administrator that is registered with AFSA’s list of registered debt agreement administrators. Fees also vary widely between administrators, so always review the payment terms before making any decisions.
If you’re still uncertain if a debt agreement is the right alternative for you, phone Bankruptcy Experts Gladstone on 1300 795 575 who can give you the right advice, the first time. To read more, visit www.bankruptcyexpertsgladstone.com.au.