A lot of Australians encounter financial issues during their lifetime, and this is mainly regarded as a natural fluctuation in our finances. But what if you’re not able to work through these difficulties yourself, but at the same time, you don’t want to file for bankruptcy?
Debt consolidation loans are a common solution that relieves folks of financial pressure by consolidating all their current debts into one easy to manage loan that’s payable each month. Moreover, debt agreements are another option 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 fundamentally a legal contract between you and your lenders 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 afford, over an arranged time frame, to settle your debts.
Itis critical to note, however, that entering a debt agreement is an ‘act of bankruptcy’ and has long-term financial implications which may have an effect on your capacity to receive credit down the track. For this reason, it’s strongly encouraged that individuals seek independent financial advice before making this decision to make sure this is the best option for their financial situation and they clearly recognise the repercussions of such agreements.
Prior to entering a debt agreement
There are a number of things one should think about before entering into a debt agreement. Talking with your creditors about your financial circumstance is always the first step you should take to try to settle your debts outside of a debt agreement. Have you spoken with your financial institutions 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 repay your debt?
What types 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 kinds of debt are covered in debt agreements, such as the following:
- Secured debt – for instance mortgages 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 – such as debts incurred by fraud, student HECS or HELP debts, court fines, and child support
Are you entitled to enter a debt agreement?
To find out 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 option for you, a debt agreement administrator will assist you with your debt agreement proposals, based on what you can afford, and send this proposal to each of your creditors. If your creditors agree to the terms of your agreement, then your debt agreement will commence, for instance, paying 90% of your debts to lenders over a 3-year time period.
Disadvantages of debt agreements
As mentioned earlier, debt agreements are an ‘act of bankruptcy’ and consequently there are serious implications one must keep in mind.
- If your financial institutions 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 obliged to inform a new lender of your debt agreement when acquiring a loan over $5,703.
- If you own a firm trading under another name, you are legally obliged to disclose your debt agreement to any individual 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.
Decide on your debt agreement administrator carefully.
Debt agreement administrators play an integral role in the success 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 check the payment terms before making any decisions.
If you’re still uncertain if a debt agreement is the right alternative for you, reach out to Bankruptcy Wagga Wagga on 1300 818 575 who can give you the right advice, the first time. For more information, visit http://www.bankruptcy-waggawagga.com.au/.