Most Australians deal with financial challenges during their lifetime, and this is often regarded as a normal 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 declare bankruptcy?
Debt consolidation loans are a popular solution that relieves people of financial pressure by consolidating all their current debts into one easy to manage loan that’s payable every month. On the other hand, 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 comprises Part IX of the Bankruptcy Act 1966. Under this agreement, your creditors allow you to pay back a sum of money that you can manage, over an arranged period of time, to settle your debts.
Itis critical to note, however, that entering a debt agreement is an ‘act of bankruptcy’ and has long-term financial repercussions which may impair your ability to receive credit down the road. For this reason, it’s strongly encouraged that people seek independent financial counselling before making this decision to make sure this is the best alternative for their financial situation and they clearly recognise the consequences of such agreements.
Before entering a debt agreement
There are certain things one should contemplate before entering into a debt agreement. Speaking with your creditors about your financial position is always the first step you should take to try to clear up your debts outside of a debt agreement. Have you spoken to your financial institutions and asked them for extra time to repay your debt? Have you already tried to arrange a repayment plan or a smaller payment to repay your debt?
What types of debts are included in debt agreements?
Debt agreements are designed to help low income earners who are unable to pay unsecured debts. Not all types of debt are covered in debt agreements, such as the following:
- Secured debt – for instance home loans where the property can be sold to recover money
- Joint debt – if you have a joint debt with a partner, lenders can demand that your partner repays the full amount if you’re unable to
- Overseas debt
- Other debts – such as debts incurred by court fines, child support, fraud, and student HECS or HELP debts
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 solution for you, a debt agreement administrator will help you with your debt agreement proposals, based on what you can afford, and deliver this proposal to each of your lenders. If your creditors agree to the terms of your agreement, then your debt agreement will commence, for example, paying 90% of your debts to financial institutions over a 3-year time frame.
Downsides of debt agreements
As stated earlier, debt agreements are an ‘act of bankruptcy’ and as a result, there are serious implications one must consider.
- 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 mentioned on your credit report for up to five years, or longer in some situations
- You are legally obliged to alert a new creditor of your debt agreement when receiving a loan over $5,703.
- If you own an enterprise trading under another name, you are legally required to reveal your debt agreement to anyone who deals with your company.
- 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 mindfully.
Debt agreement administrators play a key role in the success of your debt agreement, so always go with an administrator that is registered with AFSA’s list of registered debt agreement administrators. Fees also fluctuate widely between administrators, so always inspect the payment terms before making any decisions.
If you’re still unclear if a debt agreement is the right choice for you, get in touch with Bankruptcy Experts Brisbane on 1300 795 575 who can give you the right advice, the first time. To learn more, visit www.bankruptcyexpertsbrisbane.com.au.