No matter which way the wind blows, people will always find themselves in trouble with their money – and it appears to be a growing problem. According to the Australian Financial Security Authority (AFSA), in the March 2016 quarter there were 2 per cent more personal insolvencies than for the same period the year before. This is the fourth quarter in a row that has been worse off than the previous year.
AFSA cites one of the main causes of personal insolvency for Australians is excessive use of credit. ASIC's Moneysmart website indicates that Australians owe about $32 billion in credit card debt. In addition to credit card debt, people often have trouble keeping up with payments on personal loans, home loans and vehicle finance agreements.
While the number of both bankruptcies and personal insolvency agreements fell, debt agreements saw a 15.6 per cent increase over the three-month period. As more Australians find themselves using this type of debt management arrangement, it seems like a good time to highlight just how this process works.
Defining a debt agreement
A debt agreement is an arrangement with your creditors to pay a proposed amount which is often less than the full amount of the debts you owe. If creditors accept your proposal, through a straightforward voting process that does not require a meeting, all of your unsecured creditors with provable debts are bound by the arrangement. Payments are generally made by affordable instalments over an extended period, often between 2 and 5 years, until the proposed amount is paid in full.
A Debt Agreement Administrator or a Bankruptcy Trustee will help set up your debt agreement. If it is accepted by your creditors they will manage the Debt Agreement, collect the payments you are required to make and liaise with your creditors regarding distributions to them when sufficient funds are available.
What are the benefits of a debt agreement?
First and foremost, a successful debt agreement means you can regain financial control and avoid bankruptcy. It also gives you an opportunity to settle outstanding debts with an affordable payment plan, which can protect valuable assets like your family home, investments, vehicles or inheritances which you may become entitled to. You may also retain your role as a company director while subject to a debt agreement.
However, there are certain aspects of the debt agreement that must be noted: your debt agreement will be registered on the National Personal Insolvency Index and your credit report for generally up to 5 years, creditors have the final word in whether your debt agreement proposal is acceptable and if your debt agreement is unsuccessful a creditor use this to apply to court to make you bankrupt. This means you must think about whether the payment terms you offer will be acceptable to your creditors, and deliver the outcomes you are looking to achieve.
Additionally, it is worth noting that bankruptcy generally only lasts for 3 years, and depending on your circumstances you may not be required to make any payments.
When is a debt agreement appropriate?
It is not a silver bullet for financial woes, but it is a way forward.
If you cannot pay your debts and would like to avoid bankruptcy, and can afford to make contributions to a debt agreement proposal, then this could be a useful course of action. It is not a silver bullet for financial woes, but it is a way forward that allows you to protect the things that are most important in your life.
It is important to note that you may only propose a debt agreement if your unsecured debts and net assets fall below a prescribed threshold ($109,036.20 at the time of writing) and your after tax income is less than the prescribed threshold ($81,777.15 at the time of writing). These amounts are updated on 20 March and 20 September each year so we recommend you check the current amounts at this link.
Facing bankruptcy can be daunting, however there are a number of personal insolvency solutions to help you overcome your difficulties. With personal insolvency levels at all time highs, there are many people facing similar challenges to you and the key to achieving better outcomes is taking steps early to get the right advice. To find out more about dealing with your debts and whether a debt agreement may be right for you, let the team at Cactus Consulting help you.