Most Australians experience financial troubles during their lifetime, and this is often considered a natural fluctuation in our finances. But what if you’re unable to work out these troubles yourself, but at the same time, you don’t want to file for bankruptcy?
Debt consolidation loans are a common solution that relieves people of financial pressure by consolidating all their current debts into one easy to manage loan that’s payable monthly. On the contrary, debt agreements are another solution 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 effectively 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 pay off a sum of money that you can afford, over an arranged time frame, 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 implications which may impact your capacity to secure credit down the road. Consequently, it’s strongly encouraged that individuals seek independent financial counselling before making this decision to make sure this is the best option for their financial situation and they clearly understand the repercussions of such agreements.
Before entering a debt agreement
There are specific things one should think about prior to entering into a debt agreement. Speaking to your financial institutions about your financial condition 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 financial institutions and asked them for additional time to repay your debt? Have you already attempted to work out a repayment plan or a smaller payment to settle your debt?
What types of debts are included in debt agreements?
Debt agreements are designed to assist 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 – for instance mortgages where the property can be sold to recoup money
- Joint debt – if you have a joint debt with your partner, financial institutions can request that your partner repays the full amount if you’re unable to
- Foreign debt
- Other debts – for instance debts incurred by fraud, student HECS or HELP debts, court fines, and child support
Are you entitled to enter a debt agreement?
To determine 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 decide that a debt agreement is the best solution for you, a debt agreement administrator will assist you with your debt agreement proposals, based upon 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 example, paying 80% of your debts to financial institutions over a 3-year time frame.
Downsides of debt agreements
As explained earlier, debt agreements are an ‘act of bankruptcy’ and as a result, there are severe implications one must keep in mind.
- If your lenders 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 recorded on your credit report for up to five years, or longer in some circumstances
- You are legally obliged to notify a new financial institution of your debt agreement when acquiring 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 enterprise.
- If your job belongs to a regulated profession or a position of trust, it may affect 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 opt for an administrator that is registered with AFSA’s list of registered debt agreement administrators. Costs also fluctuate widely between administrators, so always look into the payment terms prior to making any decisions.
If you’re still uncertain if a debt agreement is the right approach for you, reach out to Bankruptcy Experts Newcastle on 1300 795 575 who can give you the right advice, the first time. To read more, visit www.bankruptcyexpertsnewcastle.com.au.