Debt Agreement as an alternative to declaring Bankruptcy

For many, the pandemic has placed a lot of pressure on them to meet their financial commitments, with some finding themselves staring down the barrel of bankruptcy and personal insolvency.

It doesn’t need to be that way, with a debt agreement providing an alternative to bankruptcy.

Debt agreements are legally binding agreements between the debtor and their creditors and provide a flexible way for debtors to settle their debts without resorting to bankruptcy. The debtor makes repayments to a debt agreement administrator rather than directly to the creditor, making repayments more manageable, especially when multiple creditors are involved. Once the agreed payments are complete, creditors can no longer pursue the debtor for any outstanding amounts.

Before heading down the path of a debt agreement, debtors must seek advice from a financial counsellor to see if it is the right solution for them, as a debt agreement is only one many personal insolvency options available under the Bankruptcy Act. Other options include temporary debt protection (for 21 days), personal insolvency agreements and bankruptcy, as well as coming to individual agreements with your creditors.

While a debt agreement is not a declaration of bankruptcy, it will impact your credit rating (and is considered “an act of bankruptcy”). You will be listed on a register for some time, so seeking financial advice is critical.

To qualify for a debt agreement, debtors must meet specific criteria, including:

1. being insolvent (unable to afford debts)
2. You have not been declared bankrupt or entered into a debt agreement in the last ten years.
3. There are limits to the amount and type of debt you can have. Fines are not eligible for a debt agreement.
4. You must meet Australian Financial Security Authority (AFSA) criteria for unsecured debts, the amount in assets you have and your after-tax income for the next 12 months.
   

Debt agreement repayment terms can be set between three and five years, depending on whether you have assets such as a home and once entered into, all interest charges on debts for unsecured creditors are frozen for the term of the agreement.

The Process

1. Once you have found a financial adviser, they can talk you through the process and assess your eligibility. Take along any relevant paperwork such as records of your debts, recent payslips, bank statements, and proof of mortgage repayments or rental receipts. There may be fees associated with appointing a financial adviser.
2. If eligible and once your paperwork is complete and signed, it is submitted to ASFA for consideration. They will check your eligibility and contact your creditors to let them know you have submitted a debt agreement proposal. They also provide your creditors with a copy and an explanatory statement from you. There is a non-refundable $200 ASFA fee associated with submitting a debt agreement proposal. ASFA can reject a proposal if it considers it to not be in the best interests of your creditors.
3. If ASFA accepts your proposal, it sends it on to your creditors to vote on. They have 35 days to accept or reject the proposal, 42 days if your proposal is submitted in December. You may choose to continue to pay unsecured creditors while you wait for the outcome of your proposal and any payments made during that time will be deducted from the debt. However, you should continue to make repayments towards any secured loans not included in the agreement.
4. The agreement becomes binding when 50.1% of creditors accept your proposal. While you meet the terms of the agreement, you will not pay interest on your unsecured debts and creditors cannot pursue enforcement action against you or your property. If they reject your proposal, there may be an opportunity to resubmit it, depending on the reasons it was denied. However, it is worth noting that once rejected, creditors can recommence any enforcement action against you.

Australian Debt Solvers has a team of qualified financial advisers who can help you navigate the debt agreement process. Call 1300 701 206 now for an obligation-free chat.