Firstly, we would like to welcome you to our blog.
Our aim is to provide you with information that is easy to understand and to assist you to navigate your financial circumstances.
A Debt Agreement is an arrangement under the Bankruptcy Act to settle most of the debts which you cannot pay by a payment arrangement that will go over three or five years.
A Debt Agreement does have consequences, it will go on your Credit Record and the National Personal Insolvency Index for 5 years and may impact some person's employment. Debt Agreements can continue the financial pressure you are enduring. Care must be taken to ensure you have sufficient money left after Debt Agreement payments to live properly and pay your everyday bills.
You are not released from your debts till you have fully complied with the terms of your Debt Agreement.
Our ‘heads up’ - whatever way you decide to resolve your outstanding debts, going forward you must have sufficient money left out of your wages to pay your bills and live properly, otherwise, you may put your health, family life, and relationship at risk.
Debt Agreements: facts and important things for you to know.
A Debt Agreement (also called a Part 9 Debt Agreement) is provided by Part 9 of the Bankruptcy Act 1966 and is an agreement you can propose to your creditors for their consideration as a solution for your overwhelming debt. In this blog, we discuss Debt Agreements and the risks you need to be across before considering a Debt Agreement as a potential solution for your financial circumstances.
To be eligible to enter into a Debt Agreement, you must meet the following criteria:
- You are unable to pay your debts when they fall due;
- You must not have been bankrupt, a party to a Debt Agreement or Personal Insolvency Agreement in the immediately preceding 10 years;
- You cannot owe more than $119,119.00 in unsecured debts;
- You cannot own property with a total net market value of more than $238,238.00; and
- You cannot earn more than $89,339.25 after tax.
A debt agreement involves you paying a portion of your total debt, by instalments over a set period of time. Debt Agreements are administered by a Debt Agreement administrator.
Your payments are made to your Debt Agreement administrator, rather than direct payments to your creditors.
Once you finish paying the instalments required by your Debt Agreement, there is no more to pay and your creditors who are bound by the Debt Agreement cannot recover any further money from you.
To enter into a Debt Agreement, you need to prepare a Debt Agreement proposal and lodge your proposal with the Australian Financial Security Authority (AFSA). From there if your proposal is approved by AFSA they send the proposal to your creditors and a vote is conducted. Creditors vote on whether or not to enter into the Debt Agreement with you. This process normally takes 6-8 weeks. If creditors vote to accept your proposal, you then have a Debt Agreement.
You should not receive a bill from the Debt Agreement administrator. Your obligation is to comply with the terms of the Debt Agreement. Your Debt Agreement administrator is paid from the monies you are required to pay by your Debt Agreement. Typically, the administrator will receive 20% and the Federal Government 7% of the total funds you pay.
What debts can be included in a Debt Agreement?
It is important to know that not all debts can be included in a Debt Agreement.
Debt Agreements typically cover the following:
- Credit cards and store cards;
- Unsecured personal loans and pay day loans;
- Utility bills including electricity, gas, phone and internet; and
- Overdrawn bank accounts and rental arrears.
Debt Agreements cannot include the following debts:
- Court fines;
- Student loans you may have, including HECS, SFSS or HELP; and
- Debts incurred after the date you submit your debt agreement proposal to the Australian Financial and Security Authority (AFSA – the government department that oversees bankruptcy and Debt Agreements).
There are some circumstances where despite your Debt Agreement being completed, your creditor(s) can still pursue you for the balance of debt owing. These can include:
- Arrears on any child support you are assessed to pay by the Child Support Agency;
- Fines and penalties, including those made by order of a Court; and
- Debts you incurred by fraud.
What about my house and debts secured to property like my car?
If your Debt Agreement is approved by your creditors, you must make payments to your Debt Agreement administrator in accordance with the Debt Agreement.
You must also continue to pay the required monthly payments on your secured debt. For example, if you have a house mortgage or vehicle lease, for continuing use of these items you must continue to pay the required monthly payment in addition to your Debt Agreement payment. If you default on your obligations, your secured creditors have the right to repossess your property or car to recover any amounts owing. Your Debt Agreement does not prevent the secured creditor from repossessing if you default on required monthly payments.
What about tax debt?
Monies you owe to the Australian Taxation Office (ATO) are included in your Debt Agreement.
QUICK TIP: During the period of your Debt Agreement, if you owe monies to the ATO, tax refunds you are entitled to receive will be withheld by the ATO and applied against ATO debt which has been included in your Debt Agreement.
Will my name still be placed on the National Personal Insolvency Index?
Yes, your name and information will be placed on the National Personal Insolvency Index (NPII). But unlike bankruptcy, your name and information will only appear on the NPII for a certain period of time.
If you complete the terms of your Debt Agreement (meaning you make all payment instalments pursuant to the agreement), then your name and information will be public on the NPII for a period of 5 years, or the date you complete your obligations, whichever is later.
If your Debt Agreement is terminated for whatever reason, then your name and information will be public on the NPII for a period of 5 years, or 2 years after the date of termination, whichever is later.
If the Debt Agreement is declared void by a Court for whatever reason, then your name and information will be public on the NPII for a period of 5 years, or 2 years after the date the Court made the order, whichever is later.
If the debt agreement is withdrawn, rejected, cancelled or lapsed, your name will appear publicly on the NPII for a further year after the debt agreement is cancelled in this way.
The entry on the NPII will change, depending on the stage of where you are at pursuant to your Debt Agreement. For example, if the agreement is in place, it will show that it is currently ongoing, once completed, the record will reflect this.
What are the risks?
It is important for you to know that there are serious risks associated with a Debt Agreement.
Firstly, you need to know that proposing a Debt Agreement (which is the first step of lodging your proposal with AFSA) is an ‘act of bankruptcy’. By lodging this document, you are acknowledging that you cannot pay your debts as and when they fall due.
When you lodge your proposal form with AFSA, your details are automatically added to the NPII.
Secondly, if your creditors don’t agree to your proposal for the Debt Agreement and you owe more than $5,000 to a creditor, that creditor can commence the process for application to the Court for Sequestration Order making you bankrupt with the creditor’s chosen Trustee appointed.
Thirdly, you are not released from your debts till your Debt Agreement has been finalised. For example, should you become sick and fail to make the required Debt Agreement payments – ultimately causing your Debt Agreement to be terminated, then your debts will fall back onto you and your creditors can also add interest that they were unable to charge during the Debt Agreement moratorium period.
With bankruptcy, you are released from your debts when you become bankrupt whereas when you enter into a Debt Agreement you are not released from your debts till the Debt Agreement has been fully completed.
Fourthly, your Debt Agreement will be shown on your Credit Record for a minimum of 5 years, impacting your ability to obtain finance or to refinance during this time.
Fifthly, if the Debt Agreement leaves you with insufficient money to live and no buffer for unexpected bills causing you to incur defaults, those defaults will appear on your Credit Report, damaging your Credit Score further. Any defaults you receive subsequent to entering into a Debt Agreement will appear on your Credit Report for 5 years from the time of each default, preventing you from having a clean Credit Report 5 years after you entered into the Debt Agreement. This has the potential to delay further your plans for recovery and progressing your life forward.
Sixthly, if you have your own business and do not trade using your own name, the Bankruptcy Act requires you to tell all people you do business with that you are in a Debt Agreement. If you trade a business in your own name, you are not required to mention your Debt Agreement.
Is a debt agreement right for me?
QUICK TIP: Everybody’s circumstances are different. While a Debt Agreement may appear a viable option, there are serious risks and consequences associated with it. Your level of debt and personal circumstances should be assessed prior to considering the available solutions for you to consider.
Before you enter into a Debt Agreement, we highly recommend that you speak to Slade who will explain Debt Agreements further and assist you to work out whether a Debt Agreement is right for you. It is common for people who have carried overwhelming debt for some time to experience stress, medical issues, fatigue, emotional problems, depression, a tendency to become socially withdrawn and to have problems performing at work.
Your solution for your overwhelming debt must also stop the consequences born by you and your family from having that debt. To remove these, the first starting point is to make sure you and your family have adequate money to live. We recommend that you should not enter into a Debt Agreement if it will leave you with less money to live than what bankruptcy allows. With bankruptcy, if you have no dependants your wages are protected up to a minimum of $59,559.50 after tax. This amount progressively increases up to a minimum of $81,000.92 after tax if you have five or more dependants. There are many other aspects to consider for you to achieve your holistic solution to remove excessive debt, provide you and your family a decent life and remove the expensive personal and social consequences from you having overwhelming debt.
We highly recommend you speak to Slade about all the issues you need to consider when formulating your solution for your excessive debt. You can call Slade on 1300 764 197 or email: firstname.lastname@example.org
For information on bankruptcy and how it works we recommend our article: What is Bankruptcy? How Does it Work? Which can be accessed here.
For information on a Part 4 Scheme we recommend our article: What is a Part 4 Scheme? How does it work? Which can be accessed here.
For information on the National Personal Insolvency Index (NPII) we recommend our article: National Personal Insolvency Index (NPII) – What is it? Which can be accessed here.