What is a Debt Agreement?

Debt Articles > Article: What is a Debt Agreement?

Filing for bankruptcy can be extremely detrimental to your credit. Because of this, debtors should research other options and use bankruptcy as a last resort. One of the alternatives to bankruptcy available to debtors is a debt agreement.

A debt agreement is a simple, legally binding agreement between debtors and their creditors. A debt agreement is a negotiated deal. Debt agreements can result in:

  • A lower payment than the full amount of your debt (or some of your debts)
  • A deferment on debt repayment
  • A transfer of personal property to creditors to cover payment
  • Regular payments out of your income to creditors. This happens either collectively or individually.

When a debtor applies for a debt agreement, their provable unsecured debt is frozen until their creditors have time to accept the proposal. This allows the debtor to repay their debts over an extended period at an affordable weekly rate.

Debt Agreement Benefits:

  • Accruing interest on debt is frozen
  • Creditors cannot pursue you
  • A debt agreement administrator communicates with creditors for you
  • A debt agreement is less harmful to your credit file than a bankruptcy
  • You are required to pay one regular payment instead of managing several payments

Is a Debt Agreement the same as Debt Consolidation?

A debt agreement should not be confused with debt consolidation. Debt consolidation is the act of transferring balances from high charging interest accounts to lower charging interest accounts. Debt consolidation simply puts most of your debt into one location; you still owe the same amount of money.

Although a debt agreement might sound like an appealing first option (before debt consolidation), debtors need to recognize that a debt agreement is a preventative measure (to avoid bankruptcy) and will negatively affect their credit rating.

The debt agreement proposal and the approved debt agreement will be registered on the NPII (National Personal Insolvency Index). This is where all bankruptcies are registered as well.

Do all of my creditors have to agree to my Debt Agreement?

No. Not every creditor has to approve your debt agreement proposal. The majority of your creditors must approve the agreement and 75% of the total debt (dollar amount) must be covered by the creditors who approve the proposal.

Will I be approved for a Debt Agreement?

Debt agreements are available to debtors with:

  • A total personal debt under $95,386.20
  • A net income below $71,539.65

If your debt and income fit this standard, you should consider a debt agreement as a bankruptcy alternative.

You can apply for a debt agreement if:

  • You have not filed bankruptcy, entered into another debt agreement, or been authorized for Part X of the Bankruptcy Act in the last 10 years
  • After taxes, your income is lower than $71,539.65
  • You have less than $95386.20 (approximation) in unsecured debts

Are there problems with a Debt Agreement?

  1. The Debt Agreement process requires that your creditors be willing to negotiate. Creditors are not required to accept Debt Agreements. Because of this, using a debt agreement administrator helps debtors work with creditors. A debt agreement administrator handles many debt agreements and knows how to work with creditors. A debt agreement administrator will charge a fee and debtors are required to pay this fee upfront. This expense can be wasted if your debt agreement is not approved.
  2. Debt agreements require the debtor to enter into an agreement. If a debtor finds they are unable to keep up with the approved agreement, their debt problems could worsen. Debtors must meet payments on time for the debt agreement to benefit them.

How do I set up a Debt Agreement?

  1. Assess your situation and determine if a debt agreement is the best option for you.
  2. Fill out a Debt Agreement Statement of Affairs and a Debt Agreement Proposal form. These forms should then be sent to ITSA (Insolvency and Trustee Service Australia) for processing.
  3. Once ITSA accepts the proposal, they will then record the proposal on the NPII.
  4. ITSA will process the proposal or turn the proposal over to a registered bankruptcy trustee.
  5. Unsecured creditors will then receive a summary of the statement of affairs you filed. They will also receive an explanation of the proposal.
  6. Credits must state their acceptance or rejection of the proposal (by letter or in a meeting)
  7. If the majority of your creditors approve the proposal, ITSA records the Debt Agreement on the NPII. If the majority of your creditors deny the proposal, the proposal is terminated.
  8. Debtors with a Debt Agreement in place must obey with the agreement.
  9. Money will be collected for your creditors until the proposal is paid in full.

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