Most Australians deal with financial challenges during their lifetime, and this is often considered a standard fluctuation in our finances. But what if you’re unable to work through these problems yourself, but at the same time, you don’t want to file for bankruptcy?
Debt consolidation loans are a customary option that relieves folks of financial stress by consolidating all their current debts into one easy to manage loan that’s payable every month. Likewise, debt agreements are another possibility 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 financial institutions which constitutes Part IX of the Bankruptcy Act 1966. Under this agreement, your financial institutions allow you to repay a sum of money that you can manage, over an arranged time frame, 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 have an effect on your ability to secure credit in the future. Subsequently, it’s strongly encouraged that individuals seek independent financial counselling before making this decision to make sure this is the best solution for their financial situation and they clearly understand the implications of such agreements.
Before entering a debt agreement
There are certain things one should contemplate before entering into a debt agreement. Reaching out to your lenders 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 financial institutions and asked them for additional time to repay your debt? Have you already tried to arrange 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 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 recoup money
- Joint debt – if you have a joint debt with an associate, lenders can request that your partner repays the full amount if you’re unable to
- Offshore debt
- Other debts – for example debts incurred by fraud, student HECS or HELP debts, court fines, and child support
Are you entitled to enter a debt agreement?
To discover 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 determine that a debt agreement is the best option for you, a debt agreement administrator will assist you with your debt agreement proposals, based on what you can afford, and send this proposal to each of your creditors. If your lenders accept the terms of your agreement, then your debt agreement will begin, for example, paying 80% of your debts to financial institutions over a 3-year period.
Drawbacks of debt agreements
As stated earlier, debt agreements are an ‘act of bankruptcy’ and as a result, there are serious repercussions one must consider.
- 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 listed on your credit report for up to five years, or longer in some situations
- You are legally obliged to alert 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 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.
Select your debt agreement administrator mindfully.
Debt agreement administrators play a key role in the results of your debt agreement, so always choose an administrator that is registered with AFSA’s list of registered debt agreement administrators. Costs also vary widely between administrators, so always look at the payment terms prior to making any decisions.
If you’re still uncertain if a debt agreement is the right choice for you, talk to Bankruptcy Experts Emerald on 1300 795 575 who can give you the right advice, the first time. For more details, visit www.bankruptcyexpertsemerald.com.au.