A Debt Agreement is a legally binding arrangement between a debtor and a creditor in which the debtor repays a percentage of the combined total amount owed over a set time period. With this agreement in place, the debtor avoids creditor-driven bankruptcy.
The repayment percentage is determined by the debtor’s financial situation; in other words, it’s an amount they can reasonably afford to repay over a period of time, usually three to five years. After all payments have been made, creditors cannot recover the remainder of the money debtors owe.
Debt Agreements offer benefits to both debtors and creditors. As a debtor, with your debts and interest frozen and a feasible repayment plan in place, you are able to budget and plan your finances and have peace of mind knowing you will become debt free. And if you have been rigorously pursued by creditors and their collection agencies, this will cease, which can reduce your level of stress during this challenging time. As a creditor, a Debt Agreement gives you the security of knowing you will be paid a percentage of the amount owed, which can be more than if the debtor were made bankrupt.
Before a Debt Agreement can become a legally binding agreement between you and your creditors, you must be insolvent, and your creditors must agree to the payment plan set out in your Debt Agreement proposal.
An important consideration for debtors before proposing a Debt Agreement to your creditors
If your Debt Agreement proposal is not accepted by your creditors, you may face bankruptcy. This is because Debt Agreements fall under Part IX of the Bankruptcy Act 1966 and by submitting a proposal you are committing ‘an act of bankruptcy’. Your creditors who reject your Debt Agreement proposal may use it to apply to the court to make you bankrupt.
In light of this potential consequence and the specific requirements, considerations and long-term impacts of Debt Agreements, the Australian Financial Security Authority (AFSA) recommends seeking professional financial advice and assistance before you enter this type of agreement.
Jirsch Sutherland offers professional advice and assistance throughout the entire Debt Agreement procedure, from initial consideration through to proposal lodgement, including:
- Assessment of your ability to meet the eligibility criteria to advise whether a Debt Agreement is a viable option for you
- Appraisal of your financial situation to determine the percentage of the amount you can reasonably afford to pay, as well as individual payment amounts and the repayment plan
- Assistance with sourcing required documentation, such as copies of bank statements, mortgages, and pay advice slips, and with understanding and signing forms
- Compiling and lodging your Debt Agreement proposal to the AFSA within the set time limit. (AFSA advises your creditors of your Debt Agreement proposal and provides a copy to them with an Explanatory Statement. Your creditors then vote whether to accept or reject your proposal)
- Explanation of the short and long-term impacts of a Debt Agreement (it may affect your ability to obtain credit in the future)