A large number of Australians experience financial troubles during their lifetime, and this is mainly considered a typical fluctuation in our finances. But what if you’re unable to work through 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 folks of financial anxiety by consolidating all their current debts into one easy to manage loan that’s payable monthly. 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 basically a legal contract between you and your lenders which constitutes 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 afford, over an arranged time frame, to settle your debts.
It is essential to note, however, that entering a debt agreement is an ‘act of bankruptcy’ and has long-term financial repercussions which may impair your ability to receive credit down the track. For this reason, it’s strongly encouraged that people seek independent financial counselling before making this decision to ensure this is the best choice for their financial circumstances and they clearly recognise the consequences of such agreements.
Before entering a debt agreement
There are a number of things one should take into account before entering into a debt agreement. Speaking to your lenders about your financial situation is always the first step you should take to try to work out your debts outside of a debt agreement. Have you talked to your lenders and asked them for extra time to settle your debt? Have you already tried to negotiate 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 not able to pay unsecured debts. Not all kinds of debt are covered in debt agreements, including the following:
- Secured debt – such as home mortgages where the property can be sold to recoup 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
- Offshore debt
- Other debts – for example debts incurred by child support, student HECS debts, court fines, and fraud
Are you eligible to enter a debt agreement?
To figure out 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 choice 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 financial institutions. If your financial institutions agree to the terms of your agreement, then your debt agreement will start, for example, paying 90% of your debts to financial institutions over a 3-year time frame.
Disadvantages of debt agreements
As stated earlier, debt agreements are an ‘act of bankruptcy’ and consequently there are significant repercussions one must consider.
- If your creditors 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 recorded 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 obtaining 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 company.
- If your job belongs to a regulated profession or a position of trust, it may affect your employment.
Decide on your debt agreement administrator mindfully.
Debt agreement administrators play a vital 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. Fees also fluctuate widely between administrators, so always check the payment terms before making any decisions.
If you’re still unsure if a debt agreement is the right approach for you, contact Bankruptcy Experts Perth on 1300 795 575 who can give you the right advice, the first time. To learn more, visit www.bankruptcyexpertsperth.com.au.