Most Australians encounter financial issues during their lifetime, and this is often considered a normal fluctuation in our finances. But what if you’re unable to work through these issues yourself, but at the same time, you don’t want to declare bankruptcy?
Debt consolidation loans are a popular option that relieves individuals of financial pressure by consolidating all their current debts into one easy to manage loan that’s payable every month. On the contrary, debt agreements are another approach available to individuals in financial distress, and this will be the focus of today’s article.
What is a debt agreement?
A debt agreement is ultimately 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 afford, over an arranged period of time, to settle your debts.
It is necessary to note, however, that entering a debt agreement is an ‘act of bankruptcy’ and has long-term financial implications which may affect your ability to secure credit in the future. Subsequently, it’s strongly encouraged that folks seek independent financial advice before making this decision to ensure this is the best option for their financial situation and they clearly recognise the repercussions of such agreements.
Before entering a debt agreement
There are specific things one should take into consideration before entering into a debt agreement. Speaking to your creditors 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 to your creditors and asked them for more time to settle your debt? Have you already attempted to negotiate a repayment plan or a smaller payment to repay 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 kinds of debt are covered in debt agreements, such as the following:
- Secured debt – for example home mortgages where the property can be sold to recover money
- Joint debt – if you have a joint debt with an associate, creditors can demand that your partner repays the full amount if you’re unable to
- Overseas debt
- Other debts – such as debts incurred by child support, student HECS debts, court fines, and fraud
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 elect that a debt agreement is the best alternative 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 start, for instance, paying 85% of your debts to creditors over a 3-year time period.
Downsides of debt agreements
As explained earlier, debt agreements are an ‘act of bankruptcy’ and as a result, there are significant repercussions one must keep in mind.
- 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 recorded on your credit report for up to five years, or longer in some situations
- You are legally obliged to inform a new financial institution of your debt agreement when securing a loan over $5,703.
- If you own a firm trading under another name, you are legally obliged to reveal your debt agreement to anybody who deals with your company.
- 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 integral role in the results of your debt agreement, so always go with an administrator that is registered with AFSA’s list of registered debt agreement administrators. Costs also vary widely between administrators, so always read the payment terms before making any decisions.
If you’re still unsure if a debt agreement is the right approach for you, contact Gold Coast Bankruptcy Centre on 1300 795 575 who can give you the right advice, the first time. To read more, visit www.goldcoastbankruptcycentre.com.au.