Debt agreements – be careful - Nicholls Co

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Debt agreements – be careful

Debt agreements – be careful

BE CAREFUL

Debt Agreements under Part 9 of the Bankruptcy Act are an available alternative to bankruptcy. If you enter into a Debt Agreement, like bankruptcy, a debt agreement is recorded on the National Personal Insolvency for life.

There are some restrictions on the use of Debt Agreements. For example, a person can not propose a Debt Agreement if their liabilities or assets available to creditors are greater than $123,578. Also the persons after-tax income can not be greater than $92,683.50. If a person’s financial circumstances fall within these guidelines, they can consider a Debt Agreement as an available tool or option for resolution of their financial problems.

I have mentioned on this web page, when considering solutions for financial problems, you must ensure that the financial problems are resolved and not left to fester. When people struggle with unresolvable financial debt, they become stressed, can suffer from health, emotional, relationship, and children problems. Care must be taken when considering how to solve a financial problem as if the solution involves continuing the financial stress, the downward spiral will not be stopped and there may be significant social consequences for the person experiencing the financial problems and that person’s family.

It is my view that Debt Agreements can be dangerous and care should be taken when considering a Debt agreement as an available option. For any solution to be considered for the resolution of your financial problems you must satisfy yourself that it will remove or reduce to an acceptable level the financial and consequential stress that you and your family are experiencing. I have concerns in regard to debt agreements, and these are;

1/ You must respect the needs of yourself and your family

We all must have sufficient money each week to be able to meet the cost of living and perform our daily functions. eg buy food, travel to work, rent, fuel, electricity, clothes, kids needs, etc. When looking at this very point, the Government has set an amount that a person can retain from their income whilst they are bankrupt. For example for an individual with no dependents the amount is $61,789 after-tax plus half of each after-tax dollar above that amount. For a individual with over 4 dependants the amount is $84.033.04 after-tax plus half of each after-tax dollar above that amount. For the government to be saying that this is the sort of money that people need to be able to adequately maintain themselves during bankruptcy, my question is, why should it be any different for persons who are subject to a Debt Agreement. We all need adequate financial foundations from which to run our lives. No one can operate on the smell of an oily rag without consequences, as has been identified by the government for persons who need the protection of bankruptcy.

2/ The Debt Agreement should not go for an excessively long period of time

My observation over the years is that time in itself can become a problem. I call it the ‘grind factor’. Bankruptcy lasts 3 years but many Debt Agreements are being set up for a period of 5 years. It is my view that a Debt Agreement should not go for more than 3 years (the same as bankruptcy). This ‘grind factor’ problem becomes exasperated if the Debt Agreement is not set up to ensure that the essential needs of the debtor and the debtor’s family can be met. My concern is that the Debt Agreement will provide initial relief and then become increasingly difficult as the burden of repaying past debts travels into future years. It is for this reason that I recommend that the timeline of a Debt Agreement should be for no more than 3 years. My observation is that the obligation wears people down. If the ‘grind factor’ sets in, it can return the person and that person’s family to stress, health, emotional, relationship & children problems, the very things that the Debt Agreement was meant to avoid!

3/ You are not released from your debts until the Debt Agreement has been fully complied with

It’s not over until it’s over. Debt Agreements do not make allowance for adversity like sickness, loss of employment, decrease in wages, etc. If you need to change the terms of a Debt Agreement the Debt Agreement Administrator must organise a meeting of creditors and ask creditors to approve a change to the Debt Agreement. If the creditors refuse, nothing can be done. A person is not released from the liabilities subject to a Debt Agreement until the terms of the Debt Agreement have been fully complied with. In contrast, with bankruptcy, a person gets immediate release from their liabilities. When a person obtains the protection of bankruptcy, the liabilities are then owing by the bankrupt estate. If the Debt Agreement payment arrangement can not be complied with, then the debt agreement will fail and the person’s financial problems will be worse than they were before the Debt Agreement was entered into for the following reasons;
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  1. The cost of administering the Debt Agreement will have been incurred, and
  2. Interest on debts that have not accrued during the moratorium period of the Debt Agreement will be brought back to account when the debt agreement is terminated, and
  3. Creditors would be expected to be agitated by the failure of the Debt Agreement and the continuance of non-payment. Creditors need to know whether their debt will be repaid or not. This is further stress for the person with the financial problems, having to receive and deal with the phone calls and correspondence from the creditors.

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4/ Deed Agreement failure is a disaster

The consequences of a Debt Agreement that fails can be severe. The time frame for resolution of the financial problem is unacceptably extended with consequences for the person who has the financial problems and that persons family. The exposure to the chances of medical problems, depression, relationship breakdown etc is increased. When a Debt Agreement fails, you have lost all the time that the debt agreement has involved and then need bankruptcy to resolve the financial problems, which will take another three years.

Our Recommendation for Debt Agreements

When considering a Debt Agreement you need to ensure that;

  • It adequately provides for a reasonable standard of living for the person (and that person’s family) who is trying to resolve the financial problem
  • It does not go for too long a period of time so as to allow the person who has the financial problem to deal with it and get on with life. The longer the payment arrangement goes for the harder it is. This problem is magnified if the Debt Agreement does not adequately provide for the person to be able to live adequately
  • The proposed Debt Agreement is conservatively based so that if you experience the normal adversity that is part of life, you will still be able to meet the terms of the Debt Agreement. If these requirements are not able to be met, we do not recommend that you do not consider entering into a Debt Agreements.

For more information call on 1300 060 122 or email helpdesk@nichollsco.com.au

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