What is the definition of Insolvency?
You are deemed insolvent if despite your intentions you are unable to meet your financial obligations. You may have outstanding credit card debt, school fees or business suppliers chasing you for payment. While many people may think that under the circumstances, bankruptcy is their only alternative – that is not correct.
Bankruptcy Alternative
A debt agreement is an alternative to bankruptcy under the bankruptcy law of Australia. A debt agreement is a legally binding arrangement under Part IX of the Bankruptcy Act 1966 between a debtor and their creditors under which creditors agree to accept a sum of money which the debtor can afford in lieu of money actually owed under their contract or agreement with the debtor. If you decide to negotiate a debt agreement with your creditors, it is an act of bankruptcy.
A debt agreement is made available to help debtors with unmanageable debt and can be a viable alternative to bankruptcy. Debtors are released from most of their unsecured debts at the end of the agreement period.
There are some qualifiers that determine whether you are able to apply for a debt agreement. If you qualify then the success of this arrangement will depend on your creditor’s willingness to accept you proposal as well as your commitment to abide by any agreement reached.
Advantages of Debt Agreements over a full bankruptcy
A debt agreement offer you the opportunity of negotiating an affordable payment plan with your unsecured creditors without the need to declare bankruptcy. You therefore are not subjected to any of the legislative restrictions that come with bankruptcy. These include inability to maintain company directorships, not being allowed to travel overseas during bankruptcy and having strict asset and income limits placed on the bankrupt.
While a debt agreement is also reflected on your credit report and can make it difficult for you to borrow money in the immediate future, it does offer a solution whereby your unsecured debt is accumulated into one and is paid out in affordable interest free installments over several years.
If your proposal is accepted by the majority of your creditors, you are no longer required to make payments that you can not afford. Your creditors will be required by law to stop calling to hassle you for payment.
Secured Debts are excluded
Unfortunately your secured debts do not form a part of your debt agreement. If you do reach an agreement with your unsecured creditors, but fail to make the set payments on your home loan or your car loan, these assets could be repossessed by your finance providers in order to recoup their losses from your non-payment.
Remember to maintain the payments on all your secured loan or else sell the asset yourself and repay the lender. If they repossess your losses are likely to be greater.