A lot of Australians wrestle with financial problems during their lifetime, and this is mainly regarded as a standard fluctuation in our finances. But what if you’re unable to work through these challenges yourself, but at the same time, you don’t want to declare bankruptcy?
Debt consolidation loans are a standard solution that relieves people of financial stress by consolidating all their current debts into one easy to manage loan that’s payable every month. Likewise, debt agreements are another option available to people 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 lenders which comprises Part IX of the Bankruptcy Act 1966. Under this agreement, your lenders allow you to pay back a sum of money that you can afford, over an arranged period of time, 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 affect your capacity to obtain credit down the track. Subsequently, it’s strongly encouraged that individuals seek independent financial counselling before making this decision to ensure this is the best choice for their financial situation and they clearly grasp the repercussions of such agreements.
Before entering a debt agreement
There are a number of things one should take into consideration before entering into a debt agreement. Speaking to your lenders about your financial position is always the first step you should take to try to work out your debts outside of a debt agreement. Have you spoken with your creditors and asked them for more time to settle your debt? Have you already attempted to negotiate 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 – 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 demand that your partner repays the full amount if you’re unable to
- Overseas debt
- Other debts – including debts incurred by fraud, court fines, student HECS or HELP debts, and child support
Are you entitled to enter a debt agreement?
To determine if you are eligible, 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 elect that a debt agreement is the best alternative for you, a debt agreement administrator will help you with your debt agreement proposals, based upon what you can afford, and send this proposal to each of your financial institutions. If your financial institutions agree to the terms of your agreement, then your debt agreement will start, for instance, paying 80% of your debts to creditors 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 implications one must keep in mind.
- 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 listed on your credit report for up to five years, or longer in some circumstances
- You are legally required to inform a new lender of your debt agreement when obtaining a loan over $5,703.
- If you own an enterprise trading under another name, you are legally obliged to disclose your debt agreement to any individual who deals with your firm.
- 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 cautiously.
Debt agreement administrators play an integral role in the results of your debt agreement, so always choose an administrator that is registered with AFSA’s list of registered debt agreement administrators. Prices also fluctuate widely between administrators, so always review the payment terms prior to making any decisions.
If you’re still not sure if a debt agreement is the right option for you, get in touch with Bankruptcy Experts Darwin on 1300 795 575 who can give you the right advice, the first time. To read more, visit www.bankruptcyexpertsdarwin.com.au.