Most Australians deal with financial difficulties during their lifetime, and this is largely considered a typical fluctuation in our finances. But what if you’re unable to work out these challenges yourself, but at the same time, you don’t want to declare bankruptcy?
Debt consolidation loans are a popular option that relieves individuals of financial strain by consolidating all their current debts into one easy to manage loan that’s payable monthly. Moreover, debt agreements are another approach 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 fundamentally a legal contract between you and your creditors which comprises Part IX of the Bankruptcy Act 1966. Under this agreement, your creditors allow you to repay a sum of money that you can afford, over an agreed period of time, to settle your debts.
Itis critical to note, however, that entering a debt agreement is an ‘act of bankruptcy’ and has long-term financial repercussions which may impact your ability to receive credit down the track. For this reason, it’s strongly encouraged that people seek independent financial counselling before making this decision to make sure this is the best solution for their financial circumstances and they clearly recognise the repercussions of such agreements.
Before entering a debt agreement
There are specific things one should think about prior to entering into a debt agreement. Reaching out to your creditors about your financial situation 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 creditors and asked them for additional time to repay your debt? Have you already tried to work out a repayment plan or a smaller payment to settle your debt?
What kinds of debts are covered 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 – such as home loans where the property can be sold to recoup money
- Joint debt – if you have a joint debt with an associate, lenders can demand 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 determine 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 decide 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 90% of your debts to lenders over a 3-year time frame.
Disadvantages of debt agreements
As mentioned earlier, debt agreements are an ‘act of bankruptcy’ and as a result, there are severe repercussions one must take into account.
- 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 detailed on your credit report for up to five years, or longer in some circumstances
- You are legally obliged to notify a new lender of your debt agreement when receiving a loan over $5,703.
- If you own a business trading under another name, you are legally obliged to reveal your debt agreement to any person who deals with your company.
- 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 mindfully.
Debt agreement administrators play an integral role in the results of your debt agreement, so always decide on an administrator that is registered with AFSA’s list of registered debt agreement administrators. Costs also vary widely between administrators, so always look at the payment terms before making any decisions.
If you’re still uncertain if a debt agreement is the right solution for you, talk to Bankruptcy Experts Tennant Creek on 1300 795 575 who can give you the right advice, the first time. To read more, visit www.bankruptcyexpertstennantcreek.com.au.