Things were trucking along nicely. You were managing your payments, bills, rent and expenses and living a good life as well. Then the unexpected happens- you have an accident, get sick, have a family emergency, or suddenly lose your job. It doesn’t take much longer than one missing pay cycle, and you’re behind on payments. The phone calls are flooding in, your stress levels are rising, your health, ability to get a new job and resilience to stress is out the door. You’re helpless, and the debt just keeps mounting. You probably have a million questions running through your mind! In this article, we will answer some common questions about how part 9 debt agreements work.
What do you do next?
In a situation like this, a place many people find themselves, a Debt Agreement can assist in turning lives around and helping people through a financial crisis. Debt Agreements act as a way out of mounting debt and are a legal tool designed to provide debt relief to people struggling to manage their money. Credit Counsellors have helped many people to find a way out of their unmanageable debt with a Part 9 Debt Agreement.
What is a Part 9 Debt Agreement?
A Part 9 Debt Agreement is just that- Part 9 of the Bankruptcy act. It was introduced in 1996 by the Australian Federal Government to provide an alternative to bankruptcy for people who have unmanageable debt. It works as a legally binding agreement between you and those you owe money to (creditors) and allows you to renegotiate your situation. The process of renegotiating your situation involves you committing to repay your unsecured debts at a specific rate over an agreed period of time, based on what you can afford. This is especially helpful because it is not based on what you owe. It means that you can remain honourable by giving it your best shot at paying off the debt to rectify the situation without going bankrupt.
Is a Part 9 Debt Agreement a loan?
A Part 9 Debt Agreement is NOT a loan. Even though it simplifies your repayments to one account, a debt agreement is not the same as a consolidation loan because you don’t borrow money.
Does a debt agreement affect your credit rating, and how long does a debt agreement stay on credit file? Is it true that after 7 years your credit is clear?
Minimum 5 years. A Debt Agreement will affect your credit rating for at least 5 years from the date the debt agreement was made. However, your credit rating can be affected for longer if it takes you longer than 5 years to complete your obligation under the debt agreement. A debt agreement could impact your credit score for 7 years or more (up to 10) in some rare cases.
Can I borrow money in a debt agreement?
Being in a debt agreement does not mean you cannot apply for a loan. However, you do have a duty of disclosure if the amount you are applying for is over a certain credit limit. Lenders take loan applications on a case-by-case basis, so whilst many lenders will not approve finance to somebody in a debt agreement, there may be certain circumstances under which you may get approved (i.e. with a high interest rate).
Can I buy a house or get a mortgage with a debt agreement?
Nothing stops you from applying for a mortgage if you are currently in a debt agreement or have had one in the past, but you will have to disclose the debt agreement in your loan application. Most lenders will take it on a case by case basis. If the debt agreement is current, it will be considered an ongoing expense that reduces your cash flow to service the mortgage. If you have finalised your debt agreement, some lenders will view this positively, but others might consider it a risk, so you might get knocked back for finance.
Can I get a car loan with a debt agreement?
You can apply for a car loan provided you disclose the debt agreement. Whilst most lenders will review each application individually, you could get knocked back. We generally recommend waiting 12 months until after you’ve finished the debt agreement before applying for vehicle finance. Your lender will request documentation from you, such as pay slips, bank statements and proof of residency. So, waiting those 12 months gives you the chance to save a deposit, maintain regular employment, develop a stable rental history, and pay your bills regularly – all of which will help improve your credit score. When you do make the application, be sure to select an appropriate vehicle (based on the cost and your age/life situation). Note that you might also be subject to high interest rates – so consider it your first step to rebuilding a better credit rating, and make sure to shop around.
What happens if I don’t pay my Debt Agreement?
Suppose you don’t pay your debt agreement. In that case, you could be issued with a statutory default by your Debt Agreement Administrator (after 6 months in default). Alternatively, your creditors can apply for a creditor termination of the debt agreement and/or a creditor’s petition.
Can you get out of a debt agreement? How do I get out of a Part 9 Debt Agreement?
There are 3 ways to get out of a debt agreement proposal:
- Debt Agreement Termination Proposal: If you are struggling to make payments on a debt agreement, you can lodge a termination proposal with your debt agreement administrator, who will lodge this with the Official Receiver, AFSA. This debt agreement termination proposal is then voted on by creditors. The majority of creditors must agree before the termination is approved.
- Statutory Default: If you are in arrears on your debt agreement for 6 months and one day, the debt agreement is automatically terminated. Your debt agreement administrator will notify you if you are in Statutory Default.
- Creditor Termination of a Debt Agreement: If you fail to meet your obligations under a debt agreement, creditors can apply to terminate the agreement and may also issue a creditor’s petition.
What is the difference between a Debt Agreement and a Personal Insolvency Agreement?
A Personal Insolvency Agreement (PIA) is a type of debt agreement that a person can apply for if their assets, debts, or income exceeds the eligibility criteria for a part 9 debt agreement. Unlike a Part 9 Debt Agreement, a Personal Insolvency Agreement differs because:
- A trustee is appointed (instead of a debt agreement administrator) to take control of your property.
- The debtor can offer to settle by paying instalments or via a lump sum.
- The length of the PIA is flexible and can be negotiated with the Trustee and Creditors.
- The treatment of assets is usually stricter in a PIA.
- The details of a PIA will remain permanently on the NPII.
- You cannot be the director of a company whilst you are in the PIA, but you might be allowed to run your business if the terms of the PIA allow.
- A “special resolution” vote of acceptance (by a 50.01%r majority of creditors and a 75% majority of the dollar value) is required to formalise the PIA.
Is a debt agreement right for me?
When you work with Credit Counsellors to find the best ways to manage your debt, we will give you the best advice possible to suit your specific situation. You will likely have a lot of questions and will be feeling overwhelmed and uncertain. This is completely normal, and our staff have all been trained and qualified to assess your situation and help you make the best decision possible. Debt Agreements are not for everyone; that’s why we work closely with each client to make sure they meet the qualifying criteria. Whilst it is an “act of insolvency”, choosing to take on a Debt Agreement does mean that you are bankrupt. Unlike bankruptcy, the creditors to a debt agreement also choose to agree to receive less from you than what you originally signed up to pay. There are consequences to this type of agreement; we will run through all of these with you when discussing your options. If you think a Debt Agreement might be right for you, or simply have more questions about how Credit Counsellors can help you manage your debt, then contact us on 1300 003 328 or place an enquiry to receive qualified advice that will help you manage your debt, get in control of the interest and help to become debt-free.