What You Should Understand About Debt Agreements
A lot of Australians suffer through financial problems during their lifetime, and this is mainly regarded as a normal fluctuation in our finances. But what if you’re not able to work out these issues yourself, but at the same time, you don’t want to file for bankruptcy?
Debt consolidation loans are a popular option that relieves individuals of financial pressure by consolidating all their current debts into one easy to manage loan that’s payable monthly. On the contrary, debt agreements are another option 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 essentially a legal contract between you and your lenders which comprises Part IX of the Bankruptcy Act 1966. Under this agreement, your lenders allow you to repay a sum of money that you can manage, over an arranged 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 consequences which may have an effect on your capacity to secure credit down the road. Subsequently, it’s strongly encouraged that people seek independent financial advice before making this decision to ensure this is the best solution for their financial situation and they clearly recognise the repercussions of such agreements.
Prior to entering a debt agreement
There are specific things one should think about before entering into a debt agreement. Speaking to your lenders about your financial condition 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 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 included 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, including the following:
- Secured debt – such as home loans where the property can be sold to recover money
- Joint debt – if you have a joint debt with your partner, financial institutions can request that your partner repays the full amount if you’re unable to
- Overseas debt
- Other debts – for instance 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 qualified, simply 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 approach for you, a debt agreement administrator will help you with your debt agreement proposals, based on what you can afford, and deliver this proposal to each of your creditors. If your financial institutions agree to the terms of your agreement, then your debt agreement will begin, for instance, paying 85% of your debts to financial institutions 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 consider.
- If your lenders 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 noted on your credit report for up to five years, or longer in some circumstances
- You are legally required to notify a new creditor of your debt agreement when obtaining a loan over $5,703.
- If you own a business trading under another name, you are legally obliged to reveal your debt agreement to anybody who deals with your business.
- If your job belongs to a regulated profession or a position of trust, it may have an effect on your employment.
Decide on your debt agreement administrator carefully.
Debt agreement administrators play a key 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. Costs also fluctuate widely between administrators, so always look into the payment terms before making any decisions.
If you’re still unsure if a debt agreement is the right choice for you, phone Bankruptcy Experts Geelong on 1300 795 575 who can give you the right advice, the first time. For more information, visit www.bankruptcyexpertsgeelong.com.au.