Are you considering applying for a Debt Agreement, and want to know your exit options? Or are you currently in one, and it’s no longer working for you?
Here’s what you need to know about cancelling a Debt Agreement.
What is a Debt Agreement?
A Debt Agreement is a legally binding agreement between you and your creditors. As an alternative to filing for bankruptcy, in a Debt Agreement you negotiate to pay a percentage of your combined unsecured debt over a period of time (usually 3 to 5 years). Once voted on and approved by your creditors, repayments are made to your Debt Agreement administrator, rather than to your creditors. Once you have completed making the agreed payments, your obligations are completed and the debts reflected.
Cancelling a Debt Agreement
If you are unable to make your payments, it is possible to cancel a Debt Agreement. This could be because your circumstances have changed, for example you may have lost your job, your household expenses have increased, or you have an additional dependent to support.
There are three ways by which a Debt Agreement can be broken:
1. Self termination: the debtor (you) lodges a termination proposal with the Australian Financial Security Authority (AFSA). Your creditors will vote on your proposed termination in the same way they did to approve your Debt Agreement. The majority will need to accept the termination for it to be approved;
2. 6 month Statutory Default: if you Debt Agreement falls into arrears and you fail to make a payment for 6 months and 1 day, your Debt Agreement is automatically terminated;
3. Creditors termination: your creditors can apply to have your Agreement terminated if you are not meeting your contractual payments.
Consequences of Cancelling
As it is a legal contract, you will face consequences if your Debt Agreement is cancelled, by any of the above methods:
- Your debts will be reinstated
- They will start incurring interest again, and it may be backdated
- Your credit file will reflect that your Debt Agreement remains “not finalised” until the default is cleared after seven years
- Your creditors can apply to make you bankrupt through court
- Information about your Debt Agreement will remain on the National Personal Insolvency Index for a limited time.
Alternatives to Cancelling
If you are unable to keep up with the terms of your Debt Agreement, but you want to continue with the Agreement, you should talk to your administrator about applying for a variation proposal, rather than a termination. This needs to be submitted to AFSA for your creditors to vote on. If they don’t accept your variation, the terms of the original Debt Agreement remain. Creditors can apply to vary a Debt Agreement also.
So it is possible to vary or cancel your Debt Agreement if you aren’t able to make payments. However, the consequences show that it is important to ensure your Agreement is affordable before you commit to it. You should seek financial advice before applying for, or cancelling a Debt Agreement, to make the best decision for your financial situation.