Debt agreements continue to be a popular solution for people struggling financially.
According to the Australian Financial Security Authority, debt agreements made up 14,834 of the total 31,859 personal insolvency activity in 2017/18. This is compared to 16,811 for bankruptcies and 214 for personal insolvency agreements.
While they can be extremely effective, debt agreements are not always the best option. If you’re considering one, here we explain exactly what a debt agreement is, as well as run through the pros and cons, to help you make the right decision.
A debt agreement is a formal arrangement with creditors where you commit to pay a sum of money towards your debts over a set period of time (typically 3-5 years). It falls under Part IX (9) of the Bankruptcy Act 1966 and is arranged through a debt agreement administrator (DAA).
The payment amounts, terms and time frame of a debt agreement are proposed by you depending on what you can afford. Creditors then vote whether to accept or reject your proposal. If the majority accept, all creditors are bound to the agreement whether they vote or not.
Debt agreements are only available to people with an after-tax income under $85,858.50 and net assets or unsecured debts of less than $114,478.00. They are generally used for consumer debts including credit cards, personal loans and shortfalls on finance agreements.
While a debt agreement may have numerous pros, including enabling you to manage your debts without being tarnished with bankruptcy, they also have some potential downsides and demand a high level of commitment and ongoing financial stability.
A debt agreement can end up costing you more than bankruptcy and push your debt to the full five years. It also requires you to have sufficient income available to cover your living costs and debt agreement payments across the agreed time frame.
Because of this, deciding whether or not to commit to one is a personal decision that should be made based on the specifics of your situation. It’s also one that should not be taken lightly as a debt agreement can delay or worsen your financial hardship.
To help you make the right choice, we recommend you get a second opinion from someone other than a debt agreement provider before deciding to commit to one. Speaking to an insolvency specialist like us can help you weigh up whether it’s worthwhile and affordable, as well as advise you of the next steps in either case.
Keen to weigh up the options to manage your debts with a professional? Contact us today.
For more information on personal insolvency, check out our personal insolvency page here.