Many Australians encounter financial challenges during their lifetime, and this is generally considered a typical fluctuation in our finances. But what if you’re not able to work out these difficulties yourself, but at the same time, you don’t want to declare bankruptcy?
Debt consolidation loans are a common option that relieves people of financial stress by consolidating all their current debts into one easy to manage loan that’s payable monthly. Alternatively, debt agreements are another solution 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 basically a legal contract between you and your financial institutions which comprises 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 period, 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 affect your ability to secure credit in the future. Consequently, it’s strongly encouraged that individuals seek independent financial counselling before making this decision to make sure this is the best option for their financial circumstances and they clearly understand the repercussions of such agreements.
Prior to entering a debt agreement
There are specific things one should take into account before entering into a debt agreement. Talking to your lenders about your financial condition 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 more time to settle your debt? Have you already attempted to discuss a repayment plan or a smaller payment to settle your debt?
What types of debts are included in debt agreements?
Debt agreements are designed to assist 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 – for instance 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 – including debts incurred by court fines, child support, fraud, and student HECS or HELP debts
Are you entitled to enter a debt agreement?
To find 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 decide that a debt agreement is the best approach 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 financial institutions. If your creditors agree to the terms of your agreement, then your debt agreement will commence, for instance, paying 85% of your debts to creditors over a 3-year time period.
Disadvantages of debt agreements
As explained earlier, debt agreements are an ‘act of bankruptcy’ and consequently there are serious repercussions one must contemplate.
- If your creditors 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 shown on your credit report for up to five years, or longer in some circumstances
- You are legally obliged to alert a new financial institution 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 anybody 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.
Select your debt agreement administrator carefully.
Debt agreement administrators play an important role in the success 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 uncertain if a debt agreement is the right alternative for you, get in contact with Bankruptcy Experts Alice Springs on 1300 795 575 who can give you the right advice, the first time. To learn more, visit www.bankruptcyexpertsalicesprings.com.au.