Debt Agreements: The Low Cost Alternative
Debt Agreements are a low cost alternative to bankruptcy for low income earners.
Informal Debt Agreements: The Free Alternative
If you find yourself struggling, and you are genuinely unable to pay your debts, you may be able to come to an informal arrangement with your creditor (who you owe money) to pay a reduced amount up front and delay the other repayments, with a reduced interest rate.
Despite the fact an informal arrangement will impact your ability to access additional credit from existing credit providers in the short term, it’s unlikely to affect your personal credit report in the long run. However, it’s important to remember that if you have fallen behind in your repayments by 60 days or more, you may already have a default on your credit report which will remain for five years.
What is a Debt Agreement?
A Debt Agreement is a binding legal document between the person who owes money and those they owe money to (creditors) in which a compromise is reached regarding how much of the debt is to be paid. Once a Debt Agreement is made, it is binding between the parties.
In order to enter a Debt Agreement you need to:
- Be insolvent: unable to pay your debts; and
- Not have been bankrupt in the past 10 years or entered a Debt Agreement; and
- Your unsecured debts total less that $88,500. Unsecured means there is no mortgage over your possessions for the loan; and
- Your income after tax is less than $66,500; and
- The value of the property you own doesn’t exceed $88,500. Property includes anything you own except household furniture, tools of the trade, and a car worth less than $6,700.
Is a Debt Agreement right for me?
Debt Agreements are a low cost alternative to bankruptcy for low income earners and occurs where an individual who owes a debt enters an agreement to pay a portion of the debt owed, to avoid going bankrupt.
What does a Debt Agreement really mean to me?
- The individual isn’t classified as bankrupt
- All unsecured creditors are bound by the Debt Agreement and are paid in proportion to their debts
- You are generally released from most unsecured debts when you finish making your payments under the Agreement
- The Debt Agreement is listed on your Personal Credit Report for 7 years
- Secured creditors may sell and seize any of the assets tied to the loans as security if you default on repayments.
- Unsecured creditors can’t take any action against you or your property to collect their debts
- After entering a formal Debt Agreement, interest is no longer accrued, as long as you make the repayments on time in accordance with the agreement.
What if I default on a Debt Agreement?
The Debt Agreement will be automatically terminated if:
- You have not made repayments for 6 months
- You don’t complete making your repayments within 6 months after the due date
If the Debt Agreement is terminated:
- Creditors can commence a recovery action against you for the WHOLE amount
- The termination of the Debt Agreement is recorded on the National Personal Insolvency Index (NPII)
What are the Benefits of a Debt Agreement?
Debt agreements are becoming increasingly popular in Australia as they are a simpler alternative to bankruptcy.
Some of the benefits of a Debt Agreement include:
- The interest accruing on your debt is frozen
- Your credit rating is less affected than it is by bankruptcy
- You pay a single regular repayment rather than juggling multiple repayments
Download our Debt Agreement Template Now.