A large number of Australians wrestle with financial difficulties during their lifetime, and this is generally considered a natural fluctuation in our finances. But what if you’re not able to address these troubles yourself, but at the same time, you don’t want to file for bankruptcy?
Debt consolidation loans are a popular option that relieves folks of financial strain by consolidating all their current debts into one easy to manage loan that’s payable monthly. Conversely, 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 creditors 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 manage, over an agreed time period, to settle your debts.
It is vital 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 obtain credit in the future. For this reason, it’s strongly encouraged that individuals seek independent financial advice before making this decision to ensure this is the best choice for their financial circumstances and they clearly understand the consequences of such agreements.
Prior to entering a debt agreement
There are certain things one should take into account before entering into a debt agreement. Speaking to your lenders about your financial circumstance 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 additional time to repay your debt? Have you already tried to discuss a repayment plan or a smaller payment to settle your debt?
What types of debts are covered in debt agreements?
Debt agreements are designed to assist 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 – for example home loans where the property can be sold to recover money
- Joint debt – if you have a joint debt with an associate, financial institutions can request 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 entitled to enter a debt agreement?
To determine if you are qualified, 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 elect that a debt agreement is the best option 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 commence, for instance, paying 85% of your debts to creditors over a 3-year period.
Downsides of debt agreements
As explained earlier, debt agreements are an ‘act of bankruptcy’ and consequently there are serious repercussions one must take into account.
- If your creditors refuse 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 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 business trading under another name, you are legally obliged to reveal your debt agreement to any person 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 go with an administrator that is registered with AFSA’s list of registered debt agreement administrators. Costs also vary widely between administrators, so always review the payment terms before making any decisions.
If you’re still not sure if a debt agreement is the right choice for you, contact Bankruptcy Experts Townsville on 1300 795 575 who can give you the right advice, the first time. For more details, visit www.bankruptcyexpertstownsville.com.au.