Most Australians experience financial issues during their lifetime, and this is generally considered a typical fluctuation in our finances. But what if you’re not able to resolve these difficulties yourself, but at the same time, you don’t want to declare bankruptcy?
Debt consolidation loans are a customary solution that relieves people of financial strain by consolidating all their current debts into one easy to manage loan that’s payable every month. Alternatively, debt agreements are another approach available to individuals in financial distress, 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 creditors which constitutes Part IX of the Bankruptcy Act 1966. Under this agreement, your creditors allow you to pay off a sum of money that you can afford, over an arranged period of time, 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 implications which may have an effect on your capacity to secure credit down the road. Consequently, it’s strongly recommended that individuals seek independent financial guidance before making this decision to make sure this is the best alternative for their financial situation and they clearly recognise the implications of such agreements.
Prior to entering a debt agreement
There are several things one should think about prior to entering into a debt agreement. Talking with your creditors about your financial predicament is always the first step you should take to try to work out your debts outside of a debt agreement. Have you spoken to your creditors and asked them for extra time to repay your debt? Have you already tried to discuss 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 assist low income earners who are not able to pay unsecured debts. Not all types of debt are covered in debt agreements, such as the following:
- Secured debt – for example home mortgages where the property can be sold to recover 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 – for instance debts incurred by child support, student HECS debts, court fines, and fraud
Are you eligible to enter a debt agreement?
To find out if you are qualified, 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 elect that a debt agreement is the best alternative 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 lenders agree to the terms of your agreement, then your debt agreement will begin, for instance, paying 75% of your debts to financial institutions 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 repercussions one must keep in mind.
- If your financial institutions 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 mentioned on your credit report for up to five years, or longer in some situations
- You are legally obliged to notify 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 anyone who deals with your company.
- 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 mindfully.
Debt agreement administrators play an integral role in the results of your debt agreement, so always select an administrator that is registered with AFSA’s list of registered debt agreement administrators. Costs also fluctuate widely between administrators, so always look into 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 contact with Bankruptcy Experts Cairns on 1300 795 575 who can give you the right advice, the first time. For more details, visit www.bankruptcyexpertscairns.com.au.