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A debt agreement is a binding agreement between a debtor and their creditors. Debt agreements are where creditors agree to accept an amount of money that you can afford to pay, over a set period of time, to settle the debtor’s debts. Although entering a Part IX Debt Agreement is not the same as being declared bankrupt from a legal position, it is still an act of bankruptcy the effect on your credit score and the consequences for your wider life can be very similar.

What Debt Agreements Entail

Debt agreements offer an extra level of protection for debtors when it comes to repaying creditors in comparison to informal repayment plans or other arrangements (for example, when you satisfy all your obligations, you are released from all debts covered by the agreement). In order to enter into a debt agreement, you must first meet a number of eligibility requirements. If you enter a debt agreement, you will need to pay your creditors in equal proportions.

You are eligible to lodge a debt agreement proposal with the Official Receiver if:

  • You are insolvent (unable to pay your debts as and when they fall due)
  • You have not been bankrupt, previously had a Part IX Debt Agreement, or had an authority under Part X of the Bankruptcy Act in the last 10 years
  • You have unsecured debts, assets, and after tax income for the next 12 months that are all less than the indexed amounts, as set out by the Australian Financial Security Authority.
  • Pay the debt agreement lodgment fee, which as of 2016 is $200, as specified by the Australian Financial Security Authority within its fees and charges.

Similarly to bankruptcy, a debt agreement is not a solution that allows you to be released from all your debts. Also if the majority of creditors do not accept your proposal to enter a debt agreement, they may use the proposal to apply to the court to make you bankrupt, or pursue repayments via other means.

Some of the consequences of debt agreements are similar to those of being declared bankrupt.

 

Creating a Debt Agreement

If you are looking to enter into a debt agreement, you will put your proposal together with the help of a debt agreement administrator, who will assist you in completing the necessary forms. Your completed forms are first sent to the Official Receiver who will either approve or reject the application. Should the Official Receiver approve, your proposal is then sent to your creditors, who will vote on whether to accept your proposal.

Your debt agreement only becomes valid once it has been accepted by the majority of your creditors and the accepted result logged on the National Personal Insolvency Index.

What Happens After a Debt Agreement Has Been Accepted?

Once the debt agreement proposal has been voted on and accepted by your creditors:

  • The debt agreement commences and you become bound by its terms
  • You are not declared bankrupt or considered to be bankrupt, although the debt agreement will be lodged on the National Personal Insolvency Index and on your credit file
  • Your unsecured creditors are bound by the terms of the debt agreement
  • Your secured creditors may take steps to secure assets you used as security in your credit agreement
  • Unsecured creditors can take no further action against you or your property to recover debts
  • If your debt is in a joint name, creditors may pursue the other person for the debt; this debt is not written off.

Companies that advertise Part IX Debt Agreement solutions may not inform you of these consequences, so ensure you are aware of these before proceeding.

Can I Change or Terminate a Debt Agreement?

If your individual circumstance change and affect your ability to pay creditors as per the terms of the debt agreement, you can lodge a new proposal to change or terminate the agreement. If you fail to meet the terms of the debt agreement it may be terminated by the Official Receiver, at which point your creditors may commence further action in order to recover their debts.

Should you comply with all the terms of a debt agreement, it will end when you have completed all the obligations and payments that were included. At this stage you are released from your debts and the National Personal Insolvency Index will be updated to reflect this, although information will still be available on the public record for five years from the date the debt agreement is made or the date the obligations are discharged whichever is later..

Consequences of Debt Agreements

Some of the consequences of debt agreements are similar to those of being declared bankrupt. However, there are some consequences that occur even when you lodge a debt agreement proposal. If you are considering a debt agreement or have spoken to a company about entering a debt agreement, you should be aware of these consequences and consider how they might affect you before you even lodge a proposal.

Even if you only lodge a proposal for a debt agreement:

  • You are deemed to be committing an act of bankruptcy, and creditors may use your proposal to apply to have you made bankrupt if your debt agreement proposal is not accepted
  • Details of the proposal may be logged on your credit file and will affect your ability to acquire credit. If your proposal is not accepted, then credit referencing agencies have to remove this information from your credit file.

Companies that advertise Part IX Debt Agreement solutions may not inform you of these consequences, so ensure you are aware of these before proceeding.

Are They Worth It?

Given the consequences of a Part IX Debt Agreement are so similar to bankruptcy, you may find it difficult to decide that it is a suitable alternative to bankruptcy. Depending on your circumstances it may be better to seek alternative financial solutions. Such options include applying for a debt consolidation loan, a debt management plan or re-assessing your own approach to your personal finances.

 

Please seek independent legal advice for specific cases. This article is for general information only.

This article contains general comments and recommendations only. It is not intended to be and should not be construed as legal advice. This article has been prepared without taking account of your objectives, financial situation or needs. Before taking any action, you should consider the appropriateness of the comments made in the article, having regard to your objectives, financial situation and needs. If this article relates to the acquisition, or possible acquisition, of a particular credit product you should obtain and consider the relevant disclosure documents before applying for the product.

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