A lot of Australians deal with financial troubles during their lifetime, and this is mainly considered a typical fluctuation in our finances. But what if you’re not able to address these difficulties yourself, but at the same time, you don’t want to declare 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 every month. Alternatively, debt agreements are another possibility 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 basically a legal contract between you and your financial institutions which comprises Part IX of the Bankruptcy Act 1966. Under this agreement, your lenders allow you to pay off a sum of money that you can manage, over an agreed time frame, 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 impact your ability to receive credit down the track. Subsequently, it’s strongly encouraged that people seek independent financial advice before making this decision to make sure this is the best approach for their financial situation and they clearly understand the repercussions of such agreements.
Before entering a debt agreement
There are a number of things one should contemplate before entering into a debt agreement. Reaching out to your creditors about your financial predicament is always the first step you should take to try to settle your debts outside of a debt agreement. Have you talked to your financial institutions and asked them for more time to repay your debt? Have you already attempted to discuss a repayment plan or a smaller payment to settle your debt?
What types 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, including the following:
- Secured debt – for instance home loans where the property can be sold to recover money
- Joint debt – if you have a joint debt with an associate, creditors can request that your partner repays the full amount if you’re unable to
- Overseas debt
- Other debts – for example debts incurred by fraud, court fines, student HECS or HELP debts, 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 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 financial institutions. If your financial institutions agree to the terms of your agreement, then your debt agreement will commence, for example, paying 75% 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 serious repercussions one must take into consideration.
- If your lenders 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 listed on your credit report for up to five years, or longer in some circumstances
- You are legally obliged to notify a new creditor of your debt agreement when securing a loan over $5,703.
- If you own a company trading under another name, you are legally required to reveal your debt agreement to anyone who deals with your firm.
- If your job belongs to a regulated profession or a position of trust, it may have an effect on your employment.
Choose your debt agreement administrator carefully.
Debt agreement administrators play a vital 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. Fees also vary widely between administrators, so always look at the payment terms prior to making any decisions.
If you’re still unclear if a debt agreement is the right option for you, talk to Bankruptcy Experts Lismore on 1300 795 575 who can give you the right advice, the first time. For more details, visit www.bankruptcyexpertslismore.com.au.