A large number of Australians experience financial challenges during their lifetime, and this is generally considered a natural fluctuation in our finances. But what if you’re unable to work out these challenges yourself, but at the same time, you don’t want to file for bankruptcy?
Debt consolidation loans are a standard solution that relieves individuals of financial strain by consolidating all their current debts into one easy to manage loan that’s payable monthly. Conversely, debt agreements are another option 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 effectively a legal contract between you and your financial institutions which constitutes 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 time period, 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 consequences which may have an effect on your ability to acquire credit down the road. Subsequently, it’s strongly encouraged that folks seek independent financial guidance before making this decision to ensure this is the best alternative for their financial circumstances and they clearly recognise the repercussions of such agreements.
Before entering a debt agreement
There are specific things one should consider prior to entering into a debt agreement. Reaching out to your creditors about your financial predicament is always the first step you should take to try to work out your debts outside of a debt agreement. Have you spoken to your lenders and asked them for extra time to repay your debt? Have you already attempted 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 not able to pay unsecured debts. Not all types of debt are covered in debt agreements, including the following:
- Secured debt – for instance home loans where the property can be sold to recoup money
- Joint debt – if you have a joint debt with your partner, financial institutions can demand that your partner repays the full amount if you’re unable to
- Offshore 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 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 elect that a debt agreement is the best choice 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 creditors agree to the terms of your agreement, then your debt agreement will commence, for instance, paying 75% 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 as a result, there are serious implications one must take into consideration.
- If your lenders 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 detailed on your credit report for up to five years, or longer in some circumstances
- You are legally obliged to notify a new creditor of your debt agreement when securing 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 individual who deals with your company.
- If your job belongs to a regulated profession or a position of trust, it may have an effect on your employment.
Decide on your debt agreement administrator carefully.
Debt agreement administrators play an important role in the success of your debt agreement, so always choose an administrator that is registered with AFSA’s list of registered debt agreement administrators. Costs also vary widely between administrators, so always look into the payment terms before making any decisions.
If you’re still unsure if a debt agreement is the right solution for you, speak to Bankruptcy Experts Toowoomba on 1300 795 575 who can give you the right advice, the first time. To read more, visit www.bankruptcyexpertstoowoomba.com.au.