A large number of Australians deal with financial troubles during their lifetime, and this is generally considered a normal fluctuation in our finances. But what if you’re not able to work through these issues yourself, but at the same time, you don’t want to declare 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 ultimately a legal contract between you and your lenders which constitutes Part IX of the Bankruptcy Act 1966. Under this agreement, your financial institutions 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 crucial to note, however, that entering a debt agreement is an ‘act of bankruptcy’ and has long-term financial implications which may have a bearing on your capacity to receive credit down the road. Consequently, it’s strongly recommended that folks seek independent financial guidance before making this decision to make sure this is the best approach for their financial circumstances and they clearly recognise the implications of such agreements.
Prior to entering a debt agreement
There are certain things one should take into consideration before entering into a debt agreement. Speaking to 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 talked to your lenders and asked them for extra time to settle your debt? Have you already tried to negotiate 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 help 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 home 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
- Offshore debt
- Other debts – including debts incurred by fraud, student HECS or HELP debts, court fines, and child support
Are you entitled to enter a debt agreement?
To find out 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 decide that a debt agreement is the best choice for you, a debt agreement administrator will assist you with your debt agreement proposals, based on what you can afford, and deliver this proposal to each of your lenders. If your financial institutions accept the terms of your agreement, then your debt agreement will begin, for instance, paying 80% of your debts to lenders over a 3-year time period.
Disadvantages of debt agreements
As mentioned earlier, debt agreements are an ‘act of bankruptcy’ and as a result, there are severe implications one must keep in mind.
- If your creditors 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 noted on your credit report for up to five years, or longer in some circumstances
- You are legally obliged to inform a new lender of your debt agreement when securing a loan over $5,703.
- If you own an enterprise trading under another name, you are legally required to disclose 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 mindfully.
Debt agreement administrators play an important role in the success of your debt agreement, so always decide on an administrator that is registered with AFSA’s list of registered debt agreement administrators. Prices also vary widely between administrators, so always inspect the payment terms prior to making any decisions.
If you’re still unsure if a debt agreement is the right choice for you, get in touch with Bankruptcy Experts Adelaide on 1300 795 575 who can give you the right advice, the first time. For additional information, visit www.bankruptcyexpertsadelaide.com.au.