Personal Insolvency Guide: How To Repay Debt
Recent statistics show that Australians are still buckling under the pressure of financial debt, with over 30,000 people filing for personal insolvency during the 2012-13 financial year.
This is includes a record number of people entering into debt agreements, 9,652 people in the last financial year, a rise of 8% on the previous year.
Most people are not aware of exactly what they are getting into when they apply for a debt agreement. A debt agreement is a form of bankruptcy, and thus brings with it major consequences. We explain more below.
So What's Causing It?
The leading cause for people aged under 25 is their excessive use of credit, while those older claimed that unemployment and general economic conditions had led to their downfall. For an explanation of a debt agreement, and help on how to file for one, read below.
What Is A Part 9 Debt Agreement?
A part 9 debt agreement is a legally binding arrangement between the debtor (someone who owes money) and the creditor. This agreement will allow the debtor to either pay the debt back in installments or in a lump sum payment, both of which would be less than the full amount of the debt. There is also an option to freeze the debt, so that additional late payments etc. will not add on the amount already owed, providing more time to get back on your feet. The creditor must accept this agreement, and if there is more than one creditor, then the majority (in value) of the creditors must agree to the arrangement.
How Is A Part 9 Debt Agreement Made?
A debt agreement proposal must be prepared and lodged using the approved forms (available to download from Insolvency & Trust Office's website). These will then go to an Official Receiver to approve, if approved this Official Receiver will then send the proposal out to your creditors for their acceptance. The proposal will then become an agreement when the voting period is over, and a result recorded on the National Personal Insolvency Index (NPII).
How To Propose A Debt Agreement
It is up to you to propose how much of your debt you will pay back, but keep in mind it has to be accepted by the creditors. You should also remember that your circumstances might change in the future, so what you can afford to pay now, you might not be able to afford to pay a few months down the track.
Limits On Who Can Propose A Part 9 Debt Agreement
You can only apply for a part 9 debt agreement if you satisfy the following conditions:
- You must be unable to pay your debts when they fall due
- You cannot have been bankrupt, or had a debt agreement, or given an authority under part X of the Bankruptcy Act in the last 10 years
- Your unsecured debts must be under $100,664.20
- Your income level must be under $75,498.15
- Pay the $200 Debt agreement proposal lodgment fee
Consequences Of Taking Out A Debt Agreement
- If proposal is not accepted, creditors can apply to force you into bankruptcy
- Merely proposing a debt agreement will go on your credit history for up to 7 years
- It will also be recorded permanently on the NPII (a public record)
- You still have to pay back your debt, or most of it.
- If trading under a business name, you have to tell everyone you deal with that you are under a debt agreement
- You also have to tell people you are under a debt agreement if you are purchasing good from them worth more than $5,197 on credit or by cheque
What Is The Difference Between Bankruptcy And A Debt Agreement?
The main difference is that declaring bankruptcy means you are released from (most of) your debt, while a debt agreement means you still have to pay back your debts, even if it is at a reduced rate. Both instruments will be reported on your credit file for up to 7 years, meaning it will be much more difficult to get any loans or credit in that period.
Another main difference is that your house can be taken to pay back your debts if you file for bankruptcy, whereas in a debt agreement it cannot (unless it is part of the security for a loan you are owing on).
Other Consequences Of Bankruptcy:
- You cannot be a director of a company
- Your pay may be garnished
- Your assets (including your house) may be taken off you
- The trustee can take assets you may have transferred out of your name before you went bankrupt
- You will be restricted from leaving the country unless you have permission from the trustee
- Your passport may be taken off you
- If you are a business or sole trader, you will have to tell everyone you do business with that you have been bankrupt/ are bankrupt.
Better Ways To Handle Your Debt
As you can see, the above options have major consequences, and should only be looked at as a last resort. Most people choose to take on debt agreements without knowing what they really are, a form of bankruptcy. Taking out either of the two options mentioned above means your credit will be ruined for at least 7 years, if not for your whole life, as any debt agreement or bankruptcy is permanently recorded on public record for anyone to see.
A Personal Loan Can Consolidate Debts
Getting into more debt to get out of debt? Sounds silly yes, but it's not. If you have bills owing to credit card companies, or electricity companies etc., then the longer you leave them unpaid, the more interest you'll get charged, or fines, late fees, it will just keep piling up and up. An easy way to fix it is to get a personal loan, pay off all the debts, stop all these extra costs, and stop the stress. Then there is only one payment to make - the personal loan repayments.
You can compare a selection of personal loans on our Personal Loan Comparison Page.
Talk To Your Creditors First
Another better option than going bankrupt or getting into a debt agreement, is to try and work something out with the creditor. Sometimes they can be more lenient than you think, or may at least offer you a payment plan and freeze any further late fees or fines.
Be wary of debt help or debt relief companies, as they love to jump straight to getting you setup with a debt agreement, the one mentioned above, which means you will have all the consequences associated with it. Make sure you know what you are getting into with these types of companies.
Better advisors to seek information and help from would be accountants, lawyers, or financial advisors, they will all know how bad it is to take out the bankruptcy options so they will do their best to do anything else and leave that as a last resort.
DebtFix is one company that speicalises in debt consolidation and management. The even provide a free consultation service.