For people in huge debt, a debt agreement is a legal alternative to declaring bankruptcy. It is mainly an agreement between the debtor and his creditors, whereby the debtor promises to pay his creditors a certain proportion of his combined debt, that he can afford to pay over a period of time.
So for this, the debtor must hire the services of a Registered Debt Agreement Administrator (RDAA), who will then draft a proposal agreement to on behalf of his debtor client and lodge it with AFSA. The proposal contains all terms and conditions of the debt agreement specifically, the percentage of debt to be paid off by the debtor and the timeframe within which the same are to be settled (generally 3 to 5 years).
The AFSA will then present the proposal to your creditors to vote upon it. Creditors holding more than 50% of the total debt, must approve the terms of the agreement, for it to be deemed as approved. For example, if you have a total debt of $200,000, then creditors to whom you cumulatively owe more than $100,000 must approve the agreement, for it to become enforceable.
Once the agreement is finalised:
- Interest will stop accruing on your debts
- Your creditors will stop bothering you as they are required to contact the RDAA in case of any queries.
- You will be required to pay off only that percentage of your total debt as stipulated in the agreement, and the balance debt will be waived off.
- In addition, in comparison to a bankruptcy, none of your assets will be frozen or auctioned and you can enjoy unrestricted foreign travel.
To be eligible for debt agreement, you must fulfil the following criteria:
- You should be insolvent, that is, you should be unable to pay your debts on their due dates
- Your unsecured assets or unsecured debts (debts against which no security is given, Eg. credit cards) should not exceed $111,675.20
- Your post-tax income for the year should not exceed $83,756.40
Also, only your unsecured debts can become a part of the debt agreement. For settling secured debts, this option cannot be used.
Other consequences of debt agreement:
- The debt agreement will stay on your credit file for a period of 5 years, and this can affect your credit rating
- Your name will also appear in the public records under the National Personal Insolvency Index.