Debt agreement has its pros and cons – is it right for you or is there a better solution?


Debt agreements are becoming increasingly popular. Of the 30,000 personal insolvencies in the 2017 financial year, 45 percent were debt agreements compared to 26 percent in 2011.

The debt agreement industry is booming – but does this mean it’s always the best solution if you’re struggling financially?

The growth of debt agreements might be due to increasing unmanageable debt from growing financial pressures on Australian households – or it could be for other reasons such as aggressive marketing undertaken by debt agreement firms.

What are the pros and cons of debt agreements? More importantly, are there more suitable options available if you are in financial difficulty and need help to manage your debt?

Debt agreements: the basics

A debt agreement is a formal agreement with your creditors to pay a sum of money towards your debts over time.

You propose the amount of contributions to be made, the time period for payment, and whether assets are to be included. Your creditors then vote to accept or reject your proposal.

Importantly, debt agreements are only available to people with net debts or assets of less than $111,675 and after-tax income no greater than $83,756. For those outside this threshold, a Personal Insolvency Agreement is similar; or other options are available.

For eligible individuals, the process is straightforward. It is all arranged through a Debt Agreement Administrator (DAA) under the Bankruptcy Act.

A majority of your creditors need to vote in favour for it to be accepted but not all creditors need to vote. If accepted, essentially all creditors are bound by the agreement, regardless of whether they vote.

Once accepted, your payments are consolidated into affordable instalments that you pay to your DAA over a number of years.

The pros and cons of debt agreements

As with any option to deal with your debts, there are benefits and limitations. The table below summarises the main pros and cons of debt agreements.

Interest on debts is frozenOften more expensive than bankruptcy (approx. 85c/$ but often >100c/$)
Creditors can no longer chase youRecorded on the National Personal Insolvency Index and your credit report for 5-7 years
Debts are consolidated into a manageable payment planIf failed, you can still become bankrupt, extending the time until you’re released from your debts
You may be able to keep your home or other assets, which could be lost in bankruptcyDAA costs (approximately 25%) may mean you pay more than the full amount of your debts
You can retain your mortgage and the applicable interest rateYou need a stable income to meet instalments for the whole 3-5 years
Avoid bankruptcy and its restrictions:
- you can keep your passport
- you can be a company director
Up-front set-up fees
High rate of acceptance by creditors (>75%)HECS/HELP, child support and fines all remain payable
Higher returns to creditors (approx. 60c/$)Most agreements last longer than bankruptcy (>85% are 5 years compared to 3 years for bankruptcy)

Who is a debt agreement best suited to?

Considering these pros and cons of debt agreements, who are they best suited to?

Debt agreements are not available to people on high incomes or with high levels of assets or debts. But you need to earn sufficient income to cover your living costs and debt agreement payments.

So, these agreements are usually used to consolidate ‘consumer’ debts, including credit cards, personal loans, and shortfalls on finance agreements.

They tend to be most helpful if you:

  • Fit the above eligibility criteria i.e. assets, debts and income limits
  • Are struggling to pay down your debts due to accruing interest
  • Won’t get back on your feet with temporary financial hardship assistance from your bank
  • Have a stable job and sufficient income to pay your debt agreement sum by instalments over 3-5 years
  • Have a house or valuable assets which may be lost in bankruptcy
  • Need to remain a company director

It’s important to note that debt agreements are a big commitment. They mostly last for five years and often result in you actually paying more than 100 percent of your total debts over this period, due to DAA fees and costs incurred.

Is a debt agreement right for you – or are there better options?

A debt agreement may ultimately be the right choice for you; but never sign up before getting a second opinion from someone other than a debt agreement provider!

Any option you choose should allow you to maintain a reasonable standard of living while solving your debt problems.

If unsuitable, a debt agreement could just delay or worsen your financial hardship. Bankruptcy can give you immediate relief from debts to start afresh, so you need to make sure that the additional cost and time of a debt agreement is worthwhile and affordable.

Speak to a financial counsellor,  AFSA, a debt advisory firm like us or an insolvency firm with a registered bankruptcy trustee. This will provide a different perspective and help you understand whether a debt agreement is the right solution for you.

If you’re still struggling to weigh-up your options, contact us here and we’ll  take you through how the options would suit you.

Posted on 08-12-17 in Business, Business insolvency, Business Solutions, Debt management, Money management and bankruptcy.