Most Australians experience financial challenges during their lifetime, and this is often considered a normal fluctuation in our finances. But what if you’re unable to work out these issues yourself, but at the same time, you don’t want to file for bankruptcy?
Debt consolidation loans are a common option that relieves individuals of financial anxiety by consolidating all their current debts into one easy to manage loan that’s payable monthly. Likewise, debt agreements are another option 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 fundamentally a legal contract between you and your financial institutions which comprises 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 manage, over an arranged time period, to settle your debts.
It’s important 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. For this reason, it’s strongly recommended that folks seek independent financial advice before making this decision to make sure this is the best alternative for their financial circumstances and they clearly grasp the implications of such agreements.
Prior to entering a debt agreement
There are several things one should consider before entering into a debt agreement. Reaching out to your creditors about your financial position is always the first step you should take to try to resolve your debts outside of a debt agreement. Have you spoken with your lenders and asked them for extra time to repay your debt? Have you already tried to negotiate a repayment plan or a smaller payment to settle your debt?
What kinds of debts are covered in debt agreements?
Debt agreements are designed to help low income earners who are unable to pay unsecured debts. Not all kinds of debt are covered in debt agreements, such as the following:
- Secured debt – such as home loans where the property can be sold to recoup 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
- Foreign debt
- Other debts – including debts incurred by fraud, court fines, student HECS or HELP debts, and child support
Are you eligible to enter a debt agreement?
To check if you are eligible, 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 decide that a debt agreement is the best option for you, a debt agreement administrator will help you with your debt agreement proposals, based on what you can afford, and send this proposal to each of your financial institutions. If your financial institutions agree to the terms of your agreement, then your debt agreement will commence, for example, paying 90% of your debts to creditors over a 3-year time period.
Disadvantages of debt agreements
As stated earlier, debt agreements are an ‘act of bankruptcy’ and consequently there are severe implications one must keep in mind.
- If your financial institutions turn down 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 shown 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 a company trading under another name, you are legally obliged to disclose your debt agreement to any person 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 a vital 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. Prices also vary widely between administrators, so always read the payment terms prior to making any decisions.
If you’re still not sure if a debt agreement is the right alternative for you, get in contact with Bankruptcy Experts Hobart on 1300 795 575 who can give you the right advice, the first time. For additional information, visit www.bankruptcyexpertshobart.com.au.