A decision to enter a debt agreement is usually preceeded by a period of financial difficulty and debt anxiety. Consequently few people take into consideration the impact of a debt agreement on their ability to borrow in the future. Nonetheless it is important to understand and take on board before choosing a debt solution.
What is a Debt Agreement?
A debt agreement is a binding agreement under Part IX of the Australian Bankruptcy Act 1966. The agreement is documented between a debtor and their creditors whereby creditors agree to accept a sum of money which the debtor can afford, in full payment of the outstanding debt.
Some of the characteristics of a Debt Agreement are:
- A formal agreement of regular affordable repayments in full settlement of the unsecured debts;
- No interest is paid on the unsecured debt, the negotiated payment are to be applied to principal repayment;
- Amount repaid in full is discounted from the overall amount owed;
- Creditors can no longer pursue the individual for outstanding debt and debt colloection agencies are legally required to stop chasing the debtor once an agreement is signed
How does it differ from Bankruptcy?
While most people understand Bankruptcy, few understand the consequences and workings of a Debt Agreement. In fact entering a Debt Agreement is an act of bankruptcy as you are required to sign to a statement that you are unable to afford your unsecured debts and could declare bankruptcy if your creditors refuse to enter a debt agreement with you. Anyone proposing a Debt Agreement to their creditors is in fact risking that any one of such creditors may “push” them into bankruptcy.
When it comes to the impact of a Debt Agreement on the individual’s ability to borrow in the future – Bankruptcy is much like a Debt Agreement.
Record of your debt agreement will remain on your credit report for up to 7 years after the agreement is signed. Furthermore individuals who pay out the agreement in full within 3 – 5 years, are still likely to face difficulty in qualifying for finance (especially unsecured loans) for years after the agreement is fully repaid.
How does a Debt Agreement impact on borrowing?
Lenders always perform a credit check of the applicant as part of the loan approval process. Any evidence found suggesting unpaid debts, a debt agreement or bankruptcy will trigger alarms. Application for unsecured finance will almost certainly be declined (credit card, personal loan etc).
Applications for a mortgage may be approved if the debts have been fully paid out/debt agreement or bankruptcy are discharged. However a larger deposit may be necessary to qualify for such a mortgage. Furthermore the costs of this finance will almost certainly be more expensive than a mortgage offered to a clean credit borrower.