What are the Consequences of a Debt Agreement?
Debt Articles > Article: What are the Consequences of a Debt Agreement?A debt agreement is a legally binding agreement between a debtor and their creditors. This agreement allows the debtor and creditor to set up payment arrangements that can result in:
- Payments less than the total amount of the debt
- A suspension of payment on the debt
- Exchange of personal property to the debtor's creditors in place of payment
- Periodic payments from the debtor's income to creditors
Debtors are eligible for a Debt Agreement if :
- They have not filed bankruptcy or utilized a debt agreement in the last 10 years.
- Their gross income is less than $52,907
- Debtor's unsecured debts are less than $70,543
- They are unable to pay the entirety of their debt back under normal circumstances
Although a debt agreement might seem like an attractive option to some debtors, they should be aware that a debt agreement is considered a form of bankruptcy protection and will unfavorably affect their credit rating. Debtors should be aware of the consequences of a debt agreement before sending in their proposal.please note these figures change from year to year, for the latest update see the itsa website at www.itsa.gov.au)
Potential Problems with a Debt Agreement:
- Creditors can refuse to accept your Debt Agreement, so debtors must be able to negotiate with their creditors.
Because creditors can refuse Debt Agreement offers, using an experienced debt agreement administrator is recommended. Unfortunately, the debt agreement administrator will require that the debtor pay a small fee upfront. This payment can be considered pointless if the debtor's proposed debt agreement is not accepted.
- Fees
Debt agreements can become expensive. As mentioned previously, a debt agreement administrator will charge a fee upfront. However, administrators also require payment once the creditors accept a repayment plan.
The upfront fees charged by administrators vary. Debtors should research administrators; a list can be obtained by calling ITSA. Debtors should see who could give them the best deal. Rates range anywhere from $200 to $2,000 (approximately).
Ongoing charges include:
- Filing and maintaining the required paperwork
- Receiving payments from the debtor and redistributing the money to creditors
- Debt Agreement Administrators' conduct could be considered inappropriate.
Debt agreement administrators must meet specific criteria before they can be registered with ITSA. Administrators can be a person or a company and must be able to perform the duties satisfactorily. If the administrator is a person, the person must be qualified and experienced.
Requirements must be fulfilled before anyone can be registered as a debt agreement administrator. Any person who has been considered insolvent in the last 10 years cannot become an administrator. Administrators cannot be a party in a debt agreement. Finally, they cannot be convicted of any offence involving fraud or dishonesty.
An administrator's registration with ITSA can be cancelled if they cannot suitably perform their duties, conduct themselves inappropriately, or if they breach conditions set forth by registration.
Some examples of inappropriate conduct are:
- Failing to manage your debt agreement properly
- Demanding that the debtor pay the ongoing administration fees for the debt agreement before the agreement has been accepted by creditors
- Proposes or encourages the debtor to propose a debt agreement that is unaffordable
- Promotes the debtor not release their financial position
- Avoids answering inquiries or disputes raised by the debtor
- Engages in illegal conduct
If a debtor believes their debt agreement administrator is acting inappropriately, they need to communicate this to the administrator first. If the administrator does not respond to the complaint, the debtor should file a complaint with 'Bankruptcy Regulation' at the ITSA (Insolvency and Trustee Service Australia.)
- Debtors who have entered into a Debt Agreement that cannot manage payments will worsen their debt problems.
A debt agreement will be terminated if the debtor has an outstanding, overdue balance that remains unpaid for six months. If the debtor does not complete their payments within six months of the completion date (for the debt agreement), the debt agreement will be terminated.
If the debt agreement is terminated, creditors can resume debt recovery action against the debtor for the entire amount owed. The termination of the debt agreement is then registered on the NPII; this will adversely affect your credit.
Is a Debt Agreement modifiable? Can they be terminated?
A debt agreement can be changed only after the majority of your creditors agree to change the agreement. Likewise, the debt agreement can be terminated if creditors agree. Debtors who enter into a debt agreement that would like to end the agreement can obtain a court order for termination. However, debtors should seek legal advice before considering this as an option.
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