A large number of Australians wrestle with financial difficulties during their lifetime, and this is mainly considered a natural fluctuation in our finances. But what if you’re unable to resolve these difficulties yourself, but at the same time, you don’t want to declare bankruptcy?
Debt consolidation loans are a popular option that relieves folks of financial strain by consolidating all their current debts into one easy to manage loan that’s payable each month. Likewise, debt agreements are another approach available to individuals 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 creditors which constitutes Part IX of the Bankruptcy Act 1966. Under this agreement, your creditors allow you to pay back a sum of money that you can manage, over an agreed time frame, to settle your debts.
It is vital to note, however, that entering a debt agreement is an ‘act of bankruptcy’ and has long-term financial repercussions which may have an effect on your capacity to obtain credit in the future. As a result, it’s strongly encouraged that individuals seek independent financial counselling before making this decision to ensure this is the best alternative for their financial circumstances and they clearly understand the consequences of such agreements.
Prior to entering a debt agreement
There are several things one should take into account before entering into a debt agreement. Reaching out to your lenders about your financial circumstance is always the first step you should take to try to clear up your debts outside of a debt agreement. Have you spoken with your lenders and asked them for more 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 covered 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 – such as home loans where the property can be sold to recoup money
- Joint debt – if you have a joint debt with your partner, lenders 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 eligible to enter a debt agreement?
To figure out 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 upon what you can afford, and deliver this proposal to each of your lenders. If your lenders agree to the terms of your agreement, then your debt agreement will commence, for example, paying 75% of your debts to lenders over a 3-year time frame.
Drawbacks 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 account.
- 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 recorded on your credit report for up to five years, or longer in some circumstances
- You are legally required to alert a new lender of your debt agreement when obtaining 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 enterprise.
- 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 cautiously.
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 fluctuate widely between administrators, so always inspect the payment terms before making any decisions.
If you’re still unclear if a debt agreement is the right alternative for you, speak with Bankruptcy Experts Sunshine Coast on 1300 795 575 who can give you the right advice, the first time. For additional information, visit www.bankruptcyexpertssunshinecoast.com.au.