If you want to settle a debt, you could enter a Part IX Debt Agreement to repay what you can afford and get your money under control. It's a binding agreement with your creditors and an alternative to declaring bankruptcy.

However, entering a debt agreement will still have an impact on your credit score and your ability to apply for lines of credit in the future. You can use this guide to understand how a Part IX Debt Agreement works, weigh up the positives and drawbacks and make the best decision for your finances.

What’s the difference between a debt agreement and bankruptcy?

While a Part 9 agreement is an act of bankruptcy, it is not a full act of bankruptcy. You are not declaring yourself bankrupt when you enter into a debt agreement. Here are some of the main differences between the two:

What are the pros and cons of a debt agreement?

If you’re considering entering into a debt agreement, here are the pros and cons you should weigh up before you take the next step:

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How does the debt agreement process work?

Here is a breakdown of the process:

1. Review the information. You need to read and review the prescribed information about the consequences of bankruptcy, debt agreements and the alternatives that are available. You can find this information on the Australian Financial Security Authority (AFSA)'s website.
2. Appoint an administrator. You have the option of administering your own debt or appointing a debt agreement administrator. If you decide to appoint an administrator you can find one on the registered debt agreement administrators section on the AFSA's website. Keep in mind you will be charged upfront and ongoing fees.
3. Debt arrangement proposal. After you appoint an administrator and they determine your insolvency and unmanageable debt and help you prepare a dent management proposal. This will outline the proposal offer in dollar terms. Separate forms will inform creditors about your financial position and your will also set out your statement of affairs. Your debt arrangement proposal will then be lodged with the Official Receiver.
4. Your creditors will vote. Following the receipt of the debt arrangement, your creditors will receive copies of the Official Receiver's Report and the Debt Arrangement Proposal. Creditors then vote on the proposal, generally within a period of five weeks. If the report is accepted by the majority it becomes an agreement and recorded on the NPII. If it's rejected by the majority it will be recorded on the NPII and creditors can continue trying to recover debts from you. If it's cancelled by the Official Receiver the NPII is updated and creditors can commence or continue with action to recover their debts.
5. If your debt agreement is accepted. You will need to comply with the debt agreement and complete it by the date listed on the proposal. Talk to your administrator if you don't think you can complete it by this date.

What happens when creditors accept a debt agreement proposal?

Acceptance of the proposal does not mean that the debtor is bankrupt. The debt agreement commences soon after and binds all unsecured creditors together, with them receiving payments in accordance to the proportion of their debts. Secured creditors have the right to seize and sell any asset offered as security by a debtor when they default.

Unsecured creditors, on the other hand, have no such provision because their debts don't involve security. Such an agreement does not absolve other individuals who have jointly owned debts with the debtor, and creditors are free to pursue them to recover their debts.

Making changes and terminating a debt agreement

If there is a change in your circumstances you can lodge a proposal to vary or terminate your debt agreement. You can lodge a variation proposal if you wish to continue with the agreement, but you cannot make previously agreed upon payments.

Creditors get to vote on this proposal in the same way as the original voting took place, and if they don't accept your new proposal the terms of the original debt agreement stay in place. Creditors can also put forth variations on the new proposal.

You can submit a termination proposal in the event of changed circumstances, an example of which includes you wanting to file for bankruptcy. Creditors then vote on this proposal, and if they don't accept it, the terms on the original debt agreement stay in place. A creditor can also file a termination proposal.

Automatic termination takes place if you don't make any payments for six months after one is due, or if you don't make all your payments within six months of the agreement's completion date.

End of a debt agreement

Once you make all payments and fulfil all obligations, the debt agreement comes to a close. At this point, all the creditors who are mentioned in the agreement release you from all associated debts. Your administrator follows this by notifying the Official Receiver of the same, and updating the NPII with details of the debt agreement end is next.

The end of a debt agreement can also come if a court orders declaring it void or terminating it, or if creditors wish to terminate the same. Terminating a debt agreement ahead of time can lead to creditors commencing recovery actions for unpaid debts, and in such instances they could include interest as well. Creditors can consider making you bankrupt, and the debt agreement termination stays on the NPII database forever.

What should you watch out for

While entering a debt agreement might seem like a good idea, make sure you discuss its pros and cons with a financial counsellor, and do this only after taking your individual circumstances into account. Here are some things you need to watch out for:

• Certain debt agreement administrators charge rather high fees for services you might not really need, or for ones that could affect you adversely. For instance, people who receive income only from Centrelink should know that it remains protected from creditors, and in case they have no assets, the high fees associated with a typical debt agreement can leave them worse off than before
• If your creditors don't accept your proposal, any one creditor can use your proposal in court to make you bankrupt
• Details can appear on records of credit reporting agencies, and this can affect your ability to obtain credit in the future
• As mentioned, your name and other relevant details also make it to the NPII database
• Keep in mind that creditors cannot enforce remedies against debtors and their properties or take debt recovery action during the voting period.

You should really only consider taking this route only after you have considered filing for bankruptcy voluntarily, and you might also want to consider making some kind of an informal arrangement with your creditors. Once you've decided to go the debt agreement way, seeking advice from an independent financial counsellor is your best bet.

What are the alternatives to a Part 9 Agreement?

If you're unsure whether a debt agreement is right for you, you may want to consider some alternative ways to get your debt under control:

• Unsecured personal loan. Depending on how much debt you owe and the state of your credit history, you may be eligible for an unsecured personal loan. You can borrow upwards of $60,000 with an unsecured personal loan and consolidate debt from multiple credit accounts.
• Free financial counselling service. Before you enter into an agreement, it can help to get some free advice to find out if this is the best route for you to take. You can give the service a call on 1800 007 007.
• Balance transfer credit cards. If the majority of your debt is on credit cards and you have good credit history, you may want to consider your balance transfer options. These cards let you transfer debt from multiple cards to one and pay no interest for an extended period of time (sometimes up to 26 months). You can compare your balance transfer card options here.

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