Most Australians deal with financial headaches during their lifetime, and this is generally regarded as a normal fluctuation in our finances. But what if you’re not able to work out these challenges yourself, but at the same time, you don’t want to declare bankruptcy?
Debt consolidation loans are a popular solution that relieves individuals of financial stress by consolidating all their current debts into one easy to manage loan that’s payable each month. On the contrary, debt agreements are another approach available to people in financial distress, 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 lenders which comprises 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 manage, over an arranged time frame, to settle your debts.
It is crucial to note, however, that entering a debt agreement is an ‘act of bankruptcy’ and has long-term financial repercussions which may impact your ability to receive credit down the track. As a result, it’s strongly recommended that individuals seek independent financial guidance before making this decision to ensure this is the best approach for their financial circumstances and they clearly recognise the implications of such agreements.
Before entering a debt agreement
There are certain things one should consider before entering into a debt agreement. Speaking to your financial institutions about your financial circumstance is always the first step you should take to try to resolve your debts outside of a debt agreement. Have you spoken with your financial institutions and asked them for extra time to settle your debt? Have you already attempted to work out 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 assist low income earners who are unable to pay unsecured debts. Not all kinds 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, lenders can demand that your partner repays the full amount if you’re unable to
- Overseas debt
- Other debts – for example debts incurred by court fines, child support, fraud, and student HECS or HELP debts
Are you eligible to enter a debt agreement?
To discover 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 alternative for you, a debt agreement administrator will assist you with your debt agreement proposals, based upon what you can afford, and send this proposal to each of your creditors. If your financial institutions accept the terms of your agreement, then your debt agreement will begin, for example, paying 75% of your debts to lenders over a 3-year time frame.
Drawbacks 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 consideration.
- If your lenders 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 listed on your credit report for up to five years, or longer in some situations
- You are legally required to notify a new financial institution of your debt agreement when acquiring a loan over $5,703.
- If you own an enterprise trading under another name, you are legally required to disclose your debt agreement to anyone who deals with your enterprise.
- If your job belongs to a regulated profession or a position of trust, it may affect your employment.
Choose your debt agreement administrator diligently.
Debt agreement administrators play an important role in the results of your debt agreement, so always select an administrator that is registered with AFSA’s list of registered debt agreement administrators. Prices also vary widely between administrators, so always look at the payment terms before making any decisions.
If you’re still unsure if a debt agreement is the right choice for you, speak to Bankruptcy Experts Northern Rivers on 1300 795 575 who can give you the right advice, the first time. For additional information, visit www.bankruptcyexpertsnorthernrivers.com.au.