If you’re considering entering into a Debt Agreement, you’ve already made the empowering personal decision to get a handle on your debt.
But before you decide from one of several options open to you, you’ll want to consider all the pros and cons so you can work out what a Debt Agreement might mean for your own particular financial situation.
What Is a Debt Agreement?
One of the methods for dealing with personal insolvency, a Debt Agreement is a legally binding contract entered into between you, the debtor, and your creditors, to whom you may owe money.
In a Debt Agreement, you essentially propose the number of repayments to be made, the amount of time this goes on for, and whether sold assets are to be included.
Working with the Debt Agreement administrator, your creditors can either reject or accept your proposal. Of course, they have an incentive to accept it. This arrangement means they are more likely to receive the money you owe in a timely manner because you are legally bound and because you aren’t declaring bankruptcy.
You have to be eligible for a Debt Agreement, however. This is an option for you as long as your debts/assets are less than $113,349 and you have an after-tax income of no more than $85,012 (as of July 2018).
Under the Bankruptcy Act 1966 in Australia, a Debt Agreement is arranged with a Debt Agreement administrator. This is the person whom the debtor makes payments to and deals with. In turn, the Debt Agreement administrator works with creditors, keeping both parties’ best interests in mind.
Debt Agreement Pros
Each path to getting out of debt has its benefits and limitations. What might preclude one person from one option might work perfectly for another. Each advantage of a Debt Agreement may or may not mean a lot to you. Weigh each one appropriately and make sure to consult experts for further financial advice.
No more phone calls from creditors
Once you file your proposal and your creditors accept, they cannot directly contact you. They must work with your Debt Agreement administrator.
Stop accruing interest on debts
The Debt Agreement, like a bankruptcy, is a period of time in which you’re protected. This includes interest — when your Agreement is accepted by creditors, your debts stop accruing interest. This means everything you pay actually reduces the overall debt amount.
Single, more manageable payment
Individuals who are tired of having to account for multiple payments each month or dealing with the hassle of trying to juggle and coordinate paydays with their debt repayments will breathe a sigh of relief from this benefit.
Like a debt consolidation loan, your Debt Agreement lumps your debt together, which means you’re only dealing with one payment made towards this Agreement each month.
Might be able to keep your home
Unlike declaring bankruptcy, in a Debt Agreement, you’re negotiating terms with your creditors. This means you can negotiate to have your assets kept out of the loop.
Can keep your mortgage
Similarly, you can keep your mortgage by keeping interest rates the same while in a Debt Agreement.
Avoid bankruptcy limitations (travel, companies)
The state of declaring and then entering into bankruptcy means that you may not be able to travel overseas, you may have to hand over your passport to the appointed Trustee and you will have to step down as a director of any company you own or are a part of.
This is not the case with Debt Agreements.
May be able to pay back your debt faster
Because your Debt Agreement effectively puts all your debt together and you can propose the length of time and amount of repayment, you may actually be able to pay your debt back faster than you might have otherwise.
Debt Agreement Cons
Are these limitations? Again, it depends on your personal financial situation. Read on to find out what may deter you from a Debt Agreement.
Can be more expensive than bankruptcy
Once you declare bankruptcy, you don’t need to pay back most of your debts. But in Debt Agreements, you’re essentially making a monthly payment that you’ll have to keep up. Debt Agreement Administrator costs and fees will also be a notable expense you’ll have to handle.
On your public record for up to 7 years
Your Debt Agreement is a mark on your credit report, directly affecting your credit rating. It remains registered on the National Personal Insolvency Index for a minimum of 5 years.
Need a stable income
It’s not just the income threshold — in order for creditors to accept your proposal and be reasonably satisfied that you can commit to the amount of repayment you’re proposing, you’ll need to have a steady income through employment.
There are up-front setup fees that are involved in a Debt Agreement that you must take care of.
Not all debts are included
There are quite a few debts that are not included in a Debt Agreement — which means that if you’re still paying these secured debts (home loans or car loans), for example, you’ll need to make sure you have enough allocated to fulfil all your commitments.
Other examples of debts that are not included in a Debt Agreement are:
- Fines, penalties or other court-ordered payments
- student HECS, HELP
- Student Financial Supplement Scheme debts
- debts incurred through fraud
Lasts longer than bankruptcy
Bankruptcy has its downsides but there is a definite end to the term: After 3 years and one day, you’re released from the state of bankruptcy. This is not the case with a Debt Agreement as most agreement terms last a minimum of 3 – 5 years.
Is a Debt Agreement the Best Option for You?
Based on this collection of Debt Agreement pros and cons, it’s time to ask yourself: Is this the right solution for your financial situation?