How Will a Debt Agreement Affect Your Credit File?

Are you considering a Part IX (9) Debt Agreement (Debt Agreement) but wondering how it might affect your credit file? There is no easy way to get out of debt. It all takes hard work and commitment. While there are a number of solutions available to help you overcome your debt, none of them are without consequence. Depending on your situation, those consequences might not be as severe as you think.

Your credit file plays a crucial role in future financial opportunities, reflecting your past financial behaviours and influencing lenders' perceptions of your creditworthiness. Defaults or late payments recorded on your credit file can complicate your ability to secure new loans, underscoring the importance of managing debt wisely.

A Debt Agreement, legislated under the Bankruptcy Act, offers a structured approach to reducing your debt. It not only allows you to consolidate your debts into one manageable repayment but also pauses the interest and fees for the duration of the agreement, typically 3 years (5 years for homeowners).  After completion of the Debt Agreement, all interest and the remaining debt is cleared and written off by your creditors. This can make your financial obligations more predictable and sustainable.

While a Debt Agreement is listed on your credit file similar to a default, it also indicates that you are taking a proactive step to manage your debts within an approved legal framework. Although creditors may not view a Debt Agreement as favourably as regular on-time payments, they often prefer it to receiving no payments at all due to an individual's inability to pay. This agreement can provide a viable solution when other repayment methods are not feasible and can be a crucial step toward preventing further financial decline.

If you are experiencing significant financial strain and traditional repayment methods are not viable, a Debt Agreement could provide the relief you need by simplifying your repayments and protecting you from further financial decline.

Do You Already Have a Default on Your Credit File?

If you are behind in repayments and being harassed by creditors, chances are, you could have at least one default already noted on your credit file. A default will last for five years and while it is on your credit file, it can be difficult for you to access credit through a loan or line of credit.

For a creditor to mark a default on your credit file, your debt must be more than $150 and at least 60 days overdue. They can then initiate collection action and begin the process of marking a default on your credit file. If you don't comply within this period and pay the debt, you will receive a default. To check if you have received a default on your credit file, you can request a FREE copy of your credit file at mycreditfile.com.au. Your credit file will have a record of your debts and list any defaults and judgements against you.

How Will a Debt Agreement Affect Your Credit File?

From the day your Debt Agreement is accepted by your creditors, the listing is recorded on your credit file, remaining visible for five years or two years after the agreement is terminated or completed, whichever period is longer. During this period, any new lenders will see this agreement and may consider you a higher risk, which could impact your ability to secure a loan.

While a Debt Agreement is listed on your credit file, it also consolidates your unsecured debts into a manageable repayment plan that halts the accrual of new defaults. This protects your file from further negative marks during the agreement term. By the end of the agreement, if you’ve met all the terms, your debts under this agreement will be settled, potentially setting you on a path to rebuild your financial standing.

What Happens Once the Debt Agreement is Complete?

Having completed a Debt Agreement means you have fulfilled your obligations within the required timeframe. This can be either through making all of the required agreed repayments on time or by paying out your Debt Agreement early. Provided you meet your obligations, your Debt Agreement will be removed from your credit file after 5 years from the day it was accepted (or two years after the agreement is terminated or completed, whichever period is longer).

Your name will also be removed from the National Personal Insolvency Index (NPII) after 5 years from the date you entered into the Debt Agreement, or the date the obligations are discharged, whichever is later.

Credit Reporting Body (CRB) should automatically remove the listing from your credit file.  If the listing has not been removed, you can contact the CRB to request its removal.  The timeframe for removing a listing upon request can vary but typically takes up to 30 days.

A credit file shows financial institutions your financial history so they can determine whether or not you are a good candidate to lend money to. As you have been unable to get new loans and debts for the last 5 years, your credit file will have very little information, which can negatively impact your credit score. It may take 3-6 months to build your score back up to normal.

We recommend you apply for a small loan, one which you know you can afford the repayments for. By regularly making the repayments on this debt, you are showing to potential lenders you are a good candidate for a loan and your credit score will increase. Once you have been able to repay your small loan, you will be in a position to apply for normal lines of credit without issue.

Common Concerns with Debt Agreements

I Want to Buy a House Within the Next Five Years

Completing your Debt Agreement is a positive step towards debt resolution, and it does help stabilise your financial situation by clearing the debts included in the agreement. However, the record of the agreement itself may still impact your ability to secure a mortgage immediately after completion.

Realistically, if buying a home is a priority, you may need to plan for additional time after the conclusion of your Debt Agreement to rebuild your credit score and improve your financial health. This could involve taking steps to establish a positive credit history, such as securing smaller forms of credit and consistently meeting all payment obligations.

Once the agreement no longer appears on your credit file and you've taken steps to rebuild your credit, approaching lenders for a home loan will become more feasible. This approach brings you closer to achieving the home ownership dream, equipped with a stronger financial foundation.

Should I Just Declare Bankruptcy?

Bankruptcy involves a number of restrictions and obligations which can be avoided in a Debt Agreement. At Revive Financial, we always recommend the solution which is best suited to your situation. Bankruptcy is often the last resort because of the impact it has on your life, not just financially.

I Don’t Need a Debt Agreement; I Just Want to Consolidate.

A debt consolidation loan is essentially a personal loan that you take out to cover your debts. You can then move forward just making the one repayment. However, if you have a default on your credit file, you may not be successful in getting in a personal loan. This is when you should consider a Debt Agreement and begin your journey to financial freedom. You can learn more about Debt Agreements here or give us a call on 1800 534 534. Our friendly Case Managers will be able to provide you with more information, advice and assistance.

For more information on Debt Agreements and how they can help you find financial relief, check out our Debt Agreement page.