Debt Agreements - The Good, The Bad and The Ugly

Debt Agreements

Debt Agreements are a popular debt consolidation option in Australia. In the right situation, a Debt Agreement can act to cease recovery proceedings, freeze your interest and get you out of debt.

Debt Agreements are the second largest category of personal insolvency activity in Australia with 8,120 debtors entering into a Debt Agreement in 2011. While a Debt Agreement is designed to help you out of debt, not every Aussie walks away with a good taste in their mouth.

This blog is going to take a look at Debt Agreements to discuss the good, the bad and the ugly sides of this debt relief strategy.

Debt Agreements - The Good

A Debt Agreement can provide unmeasurable relief to people experiencing debt. It allows people to go to their creditors and negotiate new repayment terms which will give them more time and flexibility to repay their debt.

The key features of a Debt Agreement are that it will cease recovery proceedings, so the harassing phone calls and letters will stop. It will freeze interest and charges, effectively reducing the overall debt amount and negotiates a new repayment, so the debtor might end up paying only 60c of every dollar outstanding.

For a person in severe debt, these three features are the answer to their money troubles.

Not just anyone can apply for a Debt Agreement. You need to have at least $10,000 owing and comply with a number of other set criteria.

As you will read in this blog, Debt Agreements do still have ramifications you must be prepared to live with, but having a strict application criteria helps to ensure you can only take on a Debt Agreement if your debt is bad enough.

Debt Agreements - The Bad

Debt Agreements are formal agreements between a debtor and their creditors. A Debt Agreement is monitored by Australia's governing insolvency body, Insolvency Trustee Services Australia (ITSA).
Entering into a Debt Agreement is considered a form of bankruptcy and will therefore impose certain restrictions on your finances for the life of the agreement. For a full list of restrictions and obligations involved with all debt relief strategies click here.

Your Debt Agreement will be marked on your credit file for 7 years. It generally takes 3-4 years to pay it off, and once you have repaid your debt agreement your credit file will reflect that you have been discharged.

During the agreement (3-4 years) you will face restrictions to borrow money and purchase more assets, however unlike bankruptcy, you can continue to earn as much as you like and keep your assets, like your home and car.

Once you have repaid your agreement you are free to borrow money again. You may find it difficult securing finance through traditional banks, but Many non-conforming lenders won't flinch at your debt agreement. 

Debt Agreements - The Ugly

"I entered into a Debt Agreement and it ruined my credit file. I may as well have declared Bankruptcy, at least that way I wouldn't have had to repay any debt at all" - I found this feedback in an online financial forum. I thought it was appropriate for the ugly section of this page because this statement could spark a furious debate.

While many people would agree with this statement, it is my opinion that this is the perfect example of someone who's situation was not appropriate for a Debt Agreement.

By the time someone gets to the point of needing a debt agreement, their credit file is riddled with defaults and judgements anyway. It's not the debt agreement ruining a credit file, but rather the debt incurred before a Debt Agreement was signed. While those defaults and judgements will clear from your file after two years, you need a way of getting back on top of your finances so no more defaults occur - Enter the Debt Agreement.

For the right person, a Debt Agreement can have very little impact on someones life. In fact, there is an occasion which springs to mind of someone in a Debt Agreement being able to secure a business loan and buy a small business. Although this is rare, it is entirely possible to turn your finances around while you are in a Debt Agreement.

Bankruptcy on the other hand places restrictions on your income, assets, overseas travel and in some cases even your employment. Depending on your situation, Bankruptcy might be a better alternative for you than a Debt Agreement, as with the above statement.

Conclusion

A Debt Agreement could be your saving grace or it could be a living nightmare - it all depends on its suitability to you and your circumstances.
To ensure you are undertaking the right debt relief solution for your needs, you should consult an expert.
Personal Debt Management companies specialise in pairing a struggling client with a positive solution.

 

Your Say

Have you entered into a Debt Agreement? Are you considering it? How was your experience? Would you do anything differently? Leave your comments below. I would love to hear from you.