A Debt Agreement is a way of breaking free from debt when you’re struggling. In this article we’ll look at:
- How a Debt Agreement works.
- Whether or not you’re eligible to apply.
- The consequences of entering a Debt Agreement.
- How to choose a Debt Agreement administrator
How does a Debt Agreement work?
A Debt Agreement is a way of clearing your debts when you’re in genuine difficulty. It’s important at this point to note that a Debt Agreement applies to unsecured debts (credit cards, personal loans, tax debt, old power bills, school fees, Centrelink debts, etc) and not secured debts, in other words, debts that have been borrowed against a particular asset (such as home loans or most vehicle loans). Under a Debt Agreement, your repayments on these unsecured debts are re-negotiated to a more affordable level, with the approval of the lenders you owe. So for instance,your repayments might only be 70% of what they are now and for only 4 years.
A Debt Agreement administrator looks at your current income and expenses, helps determine a repayment figure that will be acceptable to you and your lenders and then presents it to them for a formal vote. The lenders can at that stage accept or decline the new proposal. Generally however, most lenders will accept a reasonable offer if you are in genuine hardship. One key reason for this is that under a bankruptcy, the lender may receive no return at all, depending on your income and assets (and so a Debt Agreement is usually preferred). A Debt Agreement administrator will determine if this is the case in your situation and therefore whether or not your Debt Agreement is likely to be accepted.
Once your Debt Agreement has been accepted, you simply make one regular repayment to your debt administrator who in turn pays the various lenders you owe.
Is a Debt Agreement a possibility for me?
To answer this, a professional debt administrator needs to know who you owe and how much, how old the debts are, what your current income and expenses are and if you’ve previously been bankrupt or entered a Debt Agreement.
With this information they can work out whether you’re eligible and what a reasonable repayment offer will be – one that you can afford and is also likely to be accepted by your particular mix of lenders (they all have different criteria, including some who don’t accept Debt Agreements).
Are you eligible to apply?
There are certain factors that can make you ineligible to apply for a Debt Agreement. Some of the main ones are listed below.
- If you have more than $109,473.00 in unsecured debts or assets or if your after tax income is greater than $82,104.75 you cannot enter a Debt Agreement, but you may still be able to apply for a Part 10 Insolvency Arrangement or bankruptcy.
- If you’ve been discharged from bankruptcy or been in a Debt Agreement in the last ten years you cannot apply. In this situation, you can still apply for bankruptcy, subject to bankruptcy laws.
- If your debts are secured by an asset, for instance a home loan or most vehicle loans you will not be able to include them in a Debt Agreement.
- If you have child support payments, court imposed fines or HECS debts, they cannot be included in a Debt Agreement.
- If you can comfortably afford the repayment on your existing debts you are not insolvent and are ineligible for a debt agreement.
The legislation regarding Debt Agreements changes constantly, as do the requirements of individual lenders, so it’s important to speak with a Debt Administrator to work out whether you’re eligible.
What happens if I am eligible?
If you are eligible and you wish to proceed, your Debt Agreement administrator will begin preparing your application. This involves conducting a detailed interview with you (usually over the phone) to work out your financial position and make clear your hardship to your lenders. They will also complete the statutory paperwork required by the Federal Government agency, AFSA (Australian Financial Security Authority) and then present the required paperwork to AFSA and your lenders for a formal voting process. If 50% of your lenders (holding at least 75% of your debt) accept the proposal, it is then approved and becomes binding on all your lenders, regardless of how they voted.
What are the consequences of entering a Debt Agreement?
A Debt Agreement will be noted on your credit file for 5 years. This is the record checked by lenders when you apply for personal loans, mortgages, credit cards and store finance. Different lenders will respond to this notation in different ways, but you’re likely to experience the following consequences.
While you’re repaying your Debt Agreement (which usually takes between 2 and 4 years) you’re unlikely to be able to borrow anything further, which includes via credit cards, personal loans or any other kind of unsecured debt.
Information regarding your debt agreement, including your name, and some other details, will be recorded on the NPII National Personal Insolvency Index for a limited time. When you’ve completed your debt agreement, the NPII notation will be removed, but no sooner than five years from the date the debt agreement commenced.
Your ability to obtain further credit may be affected. Details of your debt agreements may also appear on a credit reporting agency’s records for up to 5 years.
How to Choose a Debt Agreement Administrator
Given the impact that debt can have on your life, as well as the time involved in establishing a Debt Agreement, it’s very important to choose the right Debt Agreement administrator. There are two points that are especially important to consider and we’ll look at both in turn.
The first is that you have to choose an administrator that will make a fair offer to your lenders. This is crucial. Unfortunately, some administrators make the offer too low in order to win your business. A debt agreement repayment should be the largest amount you can comfortably afford. When you’re speaking to your administrator ask them why they have made the repayment proposal they’re suggesting to you. Have they just pulled this figure from thin air? This ties in neatly, to our second point.
Choose an experienced Debt Agreement administrator. An experienced administrator will have dealt with all of the major Australian lenders several times and will have good working relationships with them. This will ensure that they offer the right amount in your repayment proposal, saving you the time and cost of a rejected offer. They will also have the experience and knowledge to truly assess your eligibility and explain any pitfalls to look out for.
In this article, we’ve tried to cover the key areas of a Debt Agreement, including how they work, whether or not you’re eligible, the consequences of entering a Debt Agreement and how to choose an administrator to set one up for you. While this is useful general information, it’s important to get specific information tailored to your current position.
For an obligation free consultation, call one of the friendly team at Debt Helpline on 1300 802 905 today.