WHAT IS A DEBT AGREEMENT?
A Debt Agreement, by definition, is a legally binding agreement set up between you and your creditors for you to repay an amount you can afford over a fixed period of time; usually around five years.
It allows any unsecured debts to be paid off and satisfied in full at the end of the Debt Agreement period, and will usually mean your creditors get more of their money back than if they force you into bankruptcy.
For a Debt Agreement to be approved, creditors representing at least 50% of the value owing must vote to accept it. Once they have, it’s legally binding on all of your creditors and they can’t pursue you, or take any further court action, as long as you keep to the terms of the agreement.
If you enter into a Debt Agreement then you will have an administrator that will act as your nominee. They help you put together a proposal for your creditors. Part of this will process will involve negotiating with lenders on your behalf to agree an affordable amount to repay. You will only have to pay one amount each period that aligns with your pay cycle and that will include fees for setting up and managing your Debt Agreement. You won’t have to pay extra for these fees – you simply pay the agreed amount you can afford each period and these costs will be deducted from the sum you pay every period.
Are Debt Agreements a government debt help scheme?
Debt Agreements ('Agreements') were introduced under Part IX of the Bankruptcy Act in 1996 as an alternative to bankruptcy. The idea was originally that people struggling with debts, perhaps because of a failed business endeavour, could protect themselves and repay what they could afford over a fixed period of time.
They were intended to be a flexible, low cost option for low income debtors with few assets. Under Part IX of the Bankruptcy Act, a debtor can make a repayment proposal ('Proposal') to creditors. These government-created Debt Agreements then became increasingly common among people with high levels of consumer debt, who wanted to protect their assets by avoiding bankruptcy. Today, they are relatively common but still a serious route out of unmanageable debt, and one that often allows your creditors a better chance of repayment than bankruptcy.
How common are Debt Agreements?
Bankruptcy rates are on average falling, from a high of 27,520 in the 2008-2009 financial year to 16,811 in the last financial year according to AFSA (Australian Financial Securities Authority), and that’s partly down to the increasing number of struggling debtors turning to other schemes, like Debt Agreements and informal arrangements.
In fact, figures from AFSA show that just under 15,000 people in Australia turned to a Debt Agreement as the best solution for their unsecured debts last year.
A Debt Agreement is certainly not an easy option, as it usually involves around five years of making regular repayments to creditors. However, unlike bankruptcy, it does mean you can definitely keep your home, a debt agreement also allows you to become debt free within a set period of time.
Once the payment period is up, any remaining debts are written off and the insolvency is removed from your credit reference file five years after the debt agreement was approved or once your Debt Agreement is completed, whichever is the latter.
What should I do now?
If you think a Debt Agreement could be the answer to your debt difficulties then you probably need to take advice sooner rather than later.
You can talk to one of our experienced and sympathetic advisers by calling our helpline on 1300 912 197 between 8:30am and 5pm Monday to Friday. Our advisers can discuss your situation with you, and help you figure out whether a Debt Agreement could be the best solution, or if there’s another state-backed insolvency option that’s best suit you.
Alternatively, you can contact us by completing our short contact form here and we will be in contact via your preferred method.