As covered in our recent article, debt agreements have become increasingly popular since 2007. They now account for roughly half of all personal insolvencies each year.
There are of course some significant benefits of debt agreements. But questions are increasingly being asked about whether they’re the right option for everyone who signs up for them.
A recent report suggests that most people who enter a debt agreement only obtain advice about their options from a debt agreement administrator (DAA) and do not seek independent advice. As a result, they may not be properly aware of more suitable alternatives to deal with their debts.
We look a little closer at the four commonly promoted benefits of debt agreements…
Debt agreements are better for your credit rating than bankruptcy
While there is a general perception that a debt agreement is “better” than bankruptcy, both have a serious effect on your credit report.
A debt agreement will be listed for 5-7 years and appear on the National Personal Insolvency Index. As such, your ability to obtain credit under either alternative will be affected for some time after your release.
Additionally, people who enter a debt agreement pay (on average) 85c/$ of their debts over five years. Commonly, people in bankruptcy are not required to pay anything toward their bankrupt estate and can therefore find life less stressful; some even save money during this period to reduce their future reliance on credit.
Bankruptcy is also shorter, generally lasting for three years (and it may be reduced to one year shortly).
Regardless of the option you choose, there are lenders willing to provide finance to people after their release or even to pay out their arrangements.
Before diving back into new debt, think about what you’ll do differently to avoid being in the same situation in future.
It’s the only way to keep your home
If you own a home, keeping it will no doubt be uppermost in your mind: it’s usually preferable to selling or moving.
If you can afford to maintain the mortgage payments and your other living expenses, as well as meet the proposed debt agreement payments, this may be the best option for you.
But if you’re facing bankruptcy, don’t give up hope of keeping your home. There are a number of steps you can take to keep it – both before and during bankruptcy. And some important considerations may be taken into account that increase a co-owner’s interest, reducing the value of a bankruptcy trustee’s interest.
Further information about keeping your home in bankruptcy is available in this article by our colleagues at Pearce & Heers – Advisory & Insolvency.
Debt agreements are the only way you can still run a business
However, you can certainly operate a business as a sole trader while bankrupt. In this case, only the profit you earn from your business would be included in your bankruptcy trustee’s assessment of your income.
Further information about trading a business while bankrupt is available in this article by Pearce & Heers.
Debt agreements are affordable
You should be able to cover your reasonable living expenses from your income, with no more than the balance of your income going towards your debt agreement.
However, as mentioned in the above report, debt agreements are sometimes unaffordable – with proposed instalment payments based on what the DAA expects creditors will accept rather than what’s affordable. Some people even enter debt agreements while on Centrelink benefits!
On average, creditors receive 60c/$ in debt agreements. But additional DAA fees of 25c/$ mean that people pay 85c/$ of their debts over five years. In some cases, the fees can mean that people pay more than the total of their initial debts!
Rather than relieving financial stress and solving debt problems, unaffordable arrangements can cause more stress. And, if you cannot afford to pay all of the debt agreement instalments, the agreement may be terminated and lead to three years of bankruptcy anyway.
If you’re going to enter into a debt agreement, make sure it’s affordable for you.
Our article “Pros and Cons of a Debt Agreement” covers more about debt agreements. And don’t forget the other options available: options to help manage your debts and options to deal with out of control debts can help you consider those.
Reading about your options will help but speaking to a professional can really assist with understanding the way forward. So, even if you’ve spoken to a debt agreement firm, ensure you get at least one other opinion from a financial counsellor, AFSA, an insolvency firm…or a debt advisory firm like us!
Still not sure what’s right for you? Want a second opinion? Start chatting in the live chat window on our site or call us on 1300 906 966.