Demystifying Debt Agreements

It’s no secret that some people are doing it tough right now. We know that people may be tempted to enter into financial hardship arrangements such as debt consolidation or a debt agreement as a way of relieving financial stress. But some of these arrangements can have serious consequences and there may be other options.

In a financial hardship arrangement, a lender agrees to a reduced repayment schedule for a period of time when a borrower is experiencing financial hardship. Most creditors, such as lenders, telcos, and utility providers have hardship provisions available if you are having problems paying your debts.

From 1 July 2022, most lenders can flag your credit report that a special payment arrangement is in place for a period of time as a result of financial hardship. On a positive note, as long as you stick to the negotiated payment arrangement, your credit history will show you have met your repayment obligation, as opposed to having a black mark against you for not meeting the original contracted repayment amount.

Financial hardship arrangements stay on your credit file for 12 months but the new credit reporting rules mean it shouldn’t affect your credit score. This article outlines financial hardship options and what you need to know about them.

Formal debt agreement (Part IX)

A Debt Agreement is a formal arrangement under Part IX of the Bankruptcy Act, where your creditors agree to accept part payment of the debt in equal proportions, for example, they all agree to accept 90% of the debt as full and final settlement. There are some debts that cannot be included, such as fines or student loans.

In very limited circumstances, a debt agreement can be an effective option, but due to the serious consequences, most people may be better off considering other options.

Pros

Cons

Free, independent and confidential Will work with you to find out what went wrong and how you can avoid financial problems in the future Your home is usually protected Allows you to clear most debts in 3-5 years Stops creditors contacting you You make a single, regular payment to the debt administrator, who then pays your creditors Interest and fees generally stop accumulating Can help you negotiate with lenders, telcos, utility providers, and other creditors Usually employed by community or not-for-profit- organisations and are not commercially motivated They can refer you to other free services if necessary, such as legal, health and crisis services

It is an act of bankruptcy It is legally binding It will appear on your credit report and the National Personal Insolvency Index for 5 years, or 2 years after the agreement ends You will find it difficult to get credit for at least 5 years Fees are usually very high It may affect your security clearance which could affect your Defence employment

Informal debt agreement

An informal debt agreement is a debt management plan between you and your creditors, similar to a Part IX debt agreement, but with limited impact on your credit file. Debts are typically paid off in 3-5 years. This type of informal arrangement is organised and administered by debt administration businesses, for a fee. Often a very hefty fee.

Pros	Cons
Less of an impact on your credit file than a Part IX agreement Stops creditors contacting you You make one payment to the debt agreement company and they manage your debt repayments Interest and fees are usually reduced Generally not legally binding so can renegotiate at any time	High upfront and ongoing fees for a service that is provided free by financial counsellors If creditors reject the arrangement you may still have to pay the debt administration company Paying unnecessary fees is likely to make your financial situation worse Hardship arrangement flagged on your credit file

Debt consolidation loan

Debt consolidation involves rolling your current debts into a single loan, typically a personal loan. If you have a home loan with equity in your property, you may be able to pay out other debts by increasing your mortgage.

This could be an option if your financial difficulty was a result of an isolated event and your circumstances have now changed for the better, for example your spouse lost their job but is now working again. However, if financial issues are ongoing, you could just be exacerbating the problem.

Be very careful about rolling unsecured debts, like credit cards, into a secured loan, such as a home loan. If you are not disciplined and something goes wrong, your home could be at risk.

Pros	Cons
Single repayment for consolidated debts, making it easier to manage Reduce stress of trying to make multiple repayments Mortgage interest rate may be lower than the interest on other debts	Interest rates and fees may be higher than your current loans, potentially putting you in a worse position If you don’t close refinanced debts you may be tempted to reuse the credit, getting yourself further into debt Some loans charge penalties if you repay them early

Financial Counselling (recommended option)

Unlike financial planners or advisers, who help people build wealth, for a fee, financial counsellors help people experiencing financial difficulty. Their services are free, independent and confidential. They can provide advice about your financial situation and recommend the best option for you to deal with unmanageable debt.

Financial counsellors can help you make payment arrangements with your creditors, and can also help you put strategies in place so you are less likely to find yourself in financial difficulty again.

Pros

Cons

Free, independent and confidential Will work with you to find out what went wrong and how you can avoid financial problems in the future Can help you negotiate with lenders, telcos, utility providers, and other creditors Usually employed by community or not-for-profit- organisations and are not commercially motivated They can refer you to other free services if necessary, such as legal, health and crisis services

It takes courage to stick your hand up and admit you need help

The takeaway here is, if you find yourself in financial difficulty, before it gets any worse, and before you spend any more money, contact a financial counsellor. They are free, independent, confidential, and will have your best interests at heart.

To learn more about financial counsellors read our newsletter article Financial advisers, planners and counsellors:  What’s the difference and why does it matter?

To speak with a free financial counsellor contact the National Debt Helpline on 1800 007 007, visit their website at ndh.org.au, or contact us here at the Centre.