What You Need to Understand About Debt Agreements
A lot of Australians suffer through financial challenges during their lifetime, and this is generally regarded as a natural fluctuation in our finances. But what if you’re not able to work out these problems yourself, but at the same time, you don’t want to declare bankruptcy?
Debt consolidation loans are a standard option that relieves folks of financial stress 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 ultimately 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 pay back a sum of money that you can manage, over an agreed time frame, 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 impact your capacity to secure credit in the future. As a result, it’s strongly encouraged that folks seek independent financial counselling before making this decision to make sure this is the best approach for their financial situation and they clearly recognise the consequences of such agreements.
Before entering a debt agreement
There are a number of things one should take into consideration prior to entering into a debt agreement. Speaking 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 settle 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 kinds of debt are covered in debt agreements, including 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 a partner, lenders can request that your partner repays the full amount if you’re unable to
- Overseas debt
- Other debts – such as debts incurred by fraud, court fines, student HECS or HELP debts, and child support
Are you eligible 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 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 90% of your debts to creditors over a 3-year period.
Downsides of debt agreements
As stated earlier, debt agreements are an ‘act of bankruptcy’ and as a result, there are significant implications one must consider.
- If your financial institutions refuse 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 advise a new lender of your debt agreement when receiving a loan over $5,703.
- If you own a business trading under another name, you are legally required to disclose your debt agreement to any person who deals with your business.
- If your job belongs to a regulated profession or a position of trust, it may have a bearing on your employment.
Choose your debt agreement administrator carefully.
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. Prices also vary widely between administrators, so always look into the payment terms prior to making any decisions.
If you’re still unclear if a debt agreement is the right solution for you, speak to Bankruptcy Experts Sydney on 1300 795 575 who can give you the right advice, the first time. For more information, visit www.bankruptcyexpertssydney.com.au.