A lot of Australians deal with financial challenges during their lifetime, and this is often considered a natural fluctuation in our finances. But what if you’re not able to work through these challenges 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 every month. Alternatively, debt agreements are another option 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 comprises Part IX of the Bankruptcy Act 1966. Under this agreement, your lenders allow you to repay a sum of money that you can manage, over an agreed period of time, 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 capacity to secure credit in the future. Subsequently, it’s strongly encouraged that individuals seek independent financial guidance before making this decision to ensure this is the best choice for their financial circumstances and they clearly understand the repercussions of such agreements.
Before entering a debt agreement
There are several things one should take into account before entering into a debt agreement. Speaking with your financial institutions about your financial position is always the first step you should take to try to settle your debts outside of a debt agreement. Have you spoken with your creditors and asked them for additional time to settle your debt? Have you already tried to discuss a repayment plan or a smaller payment to settle your debt?
What kinds 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 types of debt are covered in debt agreements, such as the following:
- Secured debt – such as mortgages where the property can be sold to recoup 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
- Overseas 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 figure out 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 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 creditors. If your lenders accept the terms of your agreement, then your debt agreement will commence, for instance, 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 serious repercussions one must take into consideration.
- 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 shown on your credit report for up to five years, or longer in some circumstances
- You are legally obliged to alert a new lender of your debt agreement when receiving a loan over $5,703.
- If you own a company trading under another name, you are legally obliged to reveal your debt agreement to any person who deals with your enterprise.
- If your job belongs to a regulated profession or a position of trust, it may have a bearing on your employment.
Choose your debt agreement administrator mindfully.
Debt agreement administrators play an important role in the success of your debt agreement, so always select an administrator that is registered with AFSA’s list of registered debt agreement administrators. Prices also fluctuate widely between administrators, so always check the payment terms prior to making any decisions.
If you’re still unsure if a debt agreement is the right approach for you, talk with Bankruptcy Experts Tweed Coast on 1300 795 575 who can give you the right advice, the first time. To find out more, visit www.bankruptcyexpertstweedcoast.com.au.