Understanding Debt Agreements
When debt becomes too much to handle, many people believe the only solution to be bankruptcy. This might have been true many years ago, but under the Bankruptcy Act 1966 there are two clauses that permit legally binding debt agreements. Part IX and Part X debt agreements are a debt solution that can be used as an alternative to bankruptcy.
How Do Debt Agreements Work?
Debt agreements were introduced as an alternative to bankruptcy, and a method of dealing with insolvency. In simple terms, they allow you to attempt to make a formal debt agreement with your creditors in which you negotiate terms of repayment. If creditors agree (more than half of them to be precise), then you enter a legally binding contract under the newly agreed terms.
Creditors are not obliged to accept your offer. Many do because it is a more beneficial for them than your bankruptcy. For this reason it is advisable that you keep in mind that your offer should please creditors, though obviously you can only offer to pay back what you can afford. Once they have accepted the legally binding debt agreement begins.
You must then fulfill the obligations of the debt agreement, making repayments to the schedule. Failure to do so might end in the contract being terminated. Once you have met your obligations, which often only involves paying back some of what you originally owed, then you are freed from your debt.
There are certain eligibility factors when it comes to debt agreements. You must be insolvent, have not filed for a debt agreement or bankruptcy within the last 10 years, and must meet the requirements for amount of debt and value of assets. You can see the AFSA website for more details.
When Is It Useful?
Debt agreements are a very serious debt solution that are used in cases of insolvency as an alternative to bankruptcy. As you can imagine then, they are only employed when you are experiencing extreme debt problems, cannot keep up with repayments, and cannot envision a solution using financial management or other debt solutions like consolidation. Basically, if you are considering bankruptcy then a Part IX or Part X debt agreement are your other option.
Debt agreements are less consequential than bankruptcy, but there are still some effects that you need to be made aware of.
- Debt agreements, while not considered bankruptcy, are considered an ‘act of bankruptcy’, and have marked consequences on your finances.
- The debt agreement will negatively impact your credit history for a minimum of 5 years.
- Your debt agreement will be recorded on the National Personal Insolvency Index.
- You still have to pay back some of your debts, as agreed, and you have an obligation to meet these payments. Failure to do so can leave you with little choice but to declare bankruptcy. It is imperative that you meet the obligations of your debt agreement.
Benefits Of Debt Agreements
By now you should understand that debt agreements are very serious, and are used in cases of insolvency. If, however, the situation calls for it, then debt agreements have several benefits:
- Greatly reduce the amount that you have to pay back to creditors.
- Repayment schedule based on what you can afford.
- Legal action and debt collection ceases on unsecured debts.
- Interest rates freeze on unsecured debts.
- Avoid bankruptcy.
- Released from debts once obligations of debt agreement have been met.
If you need more information on debt agreements, or you need an insolvency solution, Debt Negotiators can help you to settle the right terms with your creditors, and apply the appropriate legislation to try to avoid bankruptcy. Contact us today to arrange a free consultation.