Debt Agreements – an option to avoid bankruptcy
Debt agreements were introduced as a way for people on lower incomes who are in debt to get out of financial difficulty without the need to be declared bankrupt. They have become increasingly popular over the past few years as more and more people get into trouble with debts such as outstanding mobile phone bills and multiple credit card debts and rising interest rates and increasing fuel prices.
Basically a debt agreement is an agreement that you make with your creditors where you agree to pay back a portion of your outstanding debts. This will be an amount that you are able to pay and your creditors are willing to accept. Debt agreements can be beneficial to both parties because for the person who is struggling to repay their debts it provides the opportunity to stave off bankruptcy and for the creditors who are owed money, it means that they will at least recover part of the amount owing. If on the other hand, the person was declared bankrupt, the creditors would be unlikely to receive any of the outstanding money owed.
Who is eligible to enter into a debt agreement?
Debt agreements are specifically designed to help those on lower incomes to get out of financial difficulty and avoid bankruptcy.
To be eligible to enter into a debt agreement, you must:
- Not have been previously declared bankrupt or entered into a debt agreement within the last ten years.
- Not earn more than $54,927.
- Have unsecured debts of less than $73,236.
- Have property that is not exempt from bankruptcy of less than $73,286.
Before a debt agreement can be made binding, at least 75 percent of the person’s creditors must agree to the payment terms specified in the debt agreement.
How do I organise a debt agreement with my creditors?
If you feel you are unable to repay your debts, and you are eligible, then you may want to consider entering into a debt agreement in order to avoid bankruptcy.
To enter into a debt agreement:
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Contact your creditors, explain your financial situation and ask them if they will be willing to enter into a debt agreement. If they are, then you need to make an offer on how much you can pay back, such as 50 cents in the dollar. Remember, before you can enter into a debt agreement, 75 percent of your creditors must agree to the terms of the debt agreement.
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If your creditors are willing to accept a debt agreement, then you will need to prepare your proposal. For this, you can seek the help of a financial councillor or a public trustee or debt agreement administrator.
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You will then need to submit your debt agreement proposal to the Insolvency and Trustee Service Australia (ITSA) who will then either accept or reject your proposal based on whether their requirements have been met.
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If ITSA accepts your debt agreement proposal, and 75 percent of your creditors accept it, then it becomes binding on all parties. You will now be required to repay the debts as outlined in the proposal.
What to watch out for
There are many companies that advertise their services to help people get out of debt through debt agreements. If you decide to get the help of one of these companies, then shop around. Some will charge much more than others. Be careful when deciding on a debt administrator. Make sure you feel comfortable dealing with them. You may also benefit by seeking the services of a qualified financial councillor before deciding whether or not to enter into a debt agreement.
For more information on debt agreements, contact the Federal Government’s Insolvency and Trustee Service Australia (ITSA).