Understanding Part IX Debt Agreements
A Part IX Debt Agreement is a legally binding arrangement under the Bankruptcy Act 1966. If you are insolvent, it offers an alternative to bankruptcy by allowing you to negotiate a structured repayment plan with your creditors to settle your debts.
Under this agreement, payments are made through an appointed administrator to your creditors. Once you fulfil the agreement’s terms, your debt is considered settled, and you are released from further obligations. Unlike debt consolidation, which involves taking out a new loan to combine multiple debts into one, a Part IX Debt Agreement focuses on negotiating a deal for the existing debts directly.
What Does Being Insolvent Mean?
Being insolvent means that you are unable to pay your debts as they come due. It indicates a financial state in which liabilities exceed assets and regular payment commitments cannot be met.
How Does Part IX Debt Agreement Work?
A Part IX debt agreement is a legally binding arrangement between you and your creditors to repay a portion of your combined debt that you can afford over a set period, typically up to three years, but potentially up to five years if you own a home.
Here’s how it works:
- Negotiation and Proposal: You negotiate to pay a percentage of your total debt that you can manage. A registered debt agreement administrator helps you create a proposal, which is then submitted to the Australian Financial Security Authority (AFSA).
- Repayments: You make regular repayments to the administrator, who then distributes the funds to your creditors after deducting its fees. This simplifies the process, as you no longer need to pay each creditor individually.
- Completion: Once you have completed the payments, your creditors cannot pursue you for the remaining debt.
- Benefits and Eligibility: This option may prevent bankruptcy, benefiting both you and your creditors, who might receive more than they would if you declared bankruptcy. However, there are eligibility criteria, including limits on the amount of debt and income.
- Financial Counselling: Speak with a free financial counsellor to explore all available options and understand their consequences, such as the impact on your credit and the public record of the agreement.
- Fees: There are fees for lodging the proposal and for the administrator’s services. These fees vary, so it’s important to clarify them beforehand.
- Entering into a debt agreement can provide relief if you’re struggling with unmanageable debt, but it’s essential to consider all aspects and seek professional advice before proceeding.
Who Can Be Eligible For A Debt Agreement?
To be eligible for a Part IX debt agreement, you must meet certain requirements related to your debts, assets and income. Here are the specific eligibility requirements based on the current indexed amounts as of 1 July 2024:
- Maximum Unsecured Debts: Your total unsecured debts must be less than $140,012.
- Maximum Divisible Property: The total value of your divisible property (property that could be sold if you were bankrupt) must be less than $280,025.
- Maximum After-Tax Income: Your after-tax income for the year must be less than $105,009.
Additionally, you need to ensure that:
- You are unable to pay your debts as they become due.
- You have not been bankrupt, nor had a debt agreement, nor a personal insolvency agreement in the last 10 years.
It’s also advisable to consult with a registered debt agreement administrator or a financial counsellor to confirm your eligibility and to understand the implications of entering into a debt agreement.
Things To Consider Before Entering A Debt Agreement
Entering a debt agreement is a financial decision with long-term implications. Before committing, consider the following factors:
- Assess your current debts, income, and expenses. Ensure you have a clear understanding of your overall financial health.
- Calculate how much you owe and to whom, and determine if a debt agreement will help you manage these debts effectively.
- Evaluate whether you have the financial ability to meet the reduced repayments outlined in a debt agreement.
- Understand that a debt agreement will affect your credit score and be recorded on your credit report, making future credit assessments more difficult.
- Explore other debt-management options, such as debt consolidation, budgeting or financial counselling, before deciding on a debt agreement.
- Be aware of the fees associated with setting up and managing a debt agreement, which can range from $200 to $2,000 or more, depending on the complexity of your situation.
- Seek advice from qualified professionals, such as financial counsellors or insolvency practitioners, to ensure you fully understand the implications and requirements of a debt agreement.
Applying For A Debt Agreement
To apply for a debt agreement, you’ll need to prepare a detailed proposal that outlines your repayment plan. This includes appointing an administrator and potentially identifying assets for sale. Use our calculator to estimate your potential repayment plan and determine if a debt agreement is the right step for you.
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Benefits And Consequences Of Debt Agreement
Benefits
Drowning in bills? A debt agreement can be a great solution to your financial woes and has many great benefits.- Once your debt agreement is accepted, creditors cannot recover any further debts from you.
- The interest on your loan/credit is frozen.
- You are not subject to the restrictions that are imposed during bankruptcy.
- Reduce the stress and financial burden in your life.
- You can continue to maintain your income in some circumstances.
- Negotiating a system of periodic payments out of your salary which is set at a level that you can afford.
- Having a moratorium – temporary suspension – on your debt payments.
- Having an agreement with your creditor to pay less than the full amount of the debt that you owe.
- A transfer of some of your property from you to your creditor in full or part payment of your debt.
- Although you’re not bankrupt, proposing a debt agreement is “an act of bankruptcy”. Your creditor could use it to make you bankrupt if the agreement is not accepted.
- You will be listed on the National Personal Insolvency Index (NPII) for at least five years from the date the agreement was made.
- It will appear on your credit report.
- You cannot borrow or get goods and services on credit without declaring you’re in a debt agreement.
- Administrators charge fees between $200 and $2,000 when entering an agreement.
- The debt agreement is automatically terminated if you have arrears that have not been repaid within six months.
- If you’re entering a debt agreement for secured debts like a mortgage, car, etc. then the creditor has the right to repossess your property and car.
- Less damaging than bankruptcy; recorded for five years.
- Allows for manageable repayments and modifications.
- Fewer restrictions; you retain control over assets and income.
- Lower costs; less complex process.
- Severely affects credit; recorded for 7-plus years.
- Involves asset liquidation and strict restrictions.
- High limitations on activities and financial control.
- Higher costs and complexity due to trustee involvement.
Consequences
How To Get Out Of A Part IX Debt Agreement
Exiting a Part IX Debt Agreement in Australia involves completing the agreed-upon terms or making modifications if your financial situation changes. To fulfil the agreement, you must ensure that all payments or asset transfers are made according to the terms set out in your debt agreement. It’s crucial to stay current with payments and avoid any arrears that could disrupt the agreement’s completion.
Once you’ve adhered to the terms, work closely with your administrator to review your progress and confirm that you have met all obligations. Upon successful completion, your administrator will provide you with a certificate or statement that officially marks the end of your agreement.
In some cases, you may be able to terminate the agreement early by repaying the debt in full ahead of schedule. Discuss this possibility with your administrator to understand the process and implications. Once all terms of the agreement are met, it is finalised, and you are released from any remaining obligations. This will be noted on your credit report and the National Personal Insolvency Index (NPII). Keep all completion documents for future reference to ensure you have proof of your compliance.
After exiting the agreement, it’s important to develop a plan for managing your finances to avoid falling back into debt. Seek financial advice to help rebuild your credit and establish a stable financial footing. Make sure to meet all legal requirements and consult with a legal adviser to confirm that there are no outstanding obligations.
Lastly, take steps to repair your credit. Check your credit report for accuracy and dispute any errors. Gradually rebuild your credit history through responsible financial behaviour, which will help improve your financial stability over time.
Can I Get A Home Loan While In Part IX Debt Agreement?
No, you cannot buy a property while in debt agreement.
We can assist you, however, if you want to refinance your home loan to pay off the debt agreement. We know a few specialist lenders that can help you if you’re currently in a Part IX debt agreement.
If you’re close to the discharge date, then this is favourable to lenders; however, many lenders will consider your situation only if you’re discharged from the debt agreement.
Get Help From Experts
Our mortgage brokers know which lenders will consider a debt agreement when you apply for a mortgage. Please fill in our free online assessment form or give us a call on 1300 889 743 and one of our mortgage brokers will answer all of your queries.Frequently Asked Questions
Debt Agreement
Bankruptcy
A debt agreement is generally better if you can manage repayments and want to avoid the severe consequences of bankruptcy; however, bankruptcy may be necessary for unmanageable debt situations.
A Part IX Debt Agreement is for individuals with lower levels of debt and income. It involves a simpler process with manageable repayments, without the need for a trustee. This type of agreement is less formal, less costly, and has specific income and debt thresholds. While it affects your credit rating, it also offers a flexible approach to debt management.
On the other hand, a Part X Debt Agreement, or Personal Insolvency Agreement (PIA), is for those with higher debt levels or complex financial situations. It does not have income or debt limits and requires a trustee to manage the process. This agreement is more formal, involves detailed planning, and can include lump-sum payments or asset sales, making it a comprehensive, more expensive solution.
If you’re in a Part IX Debt Agreement, then we might be able to help you refinance your current mortgage to pay out your agreement.
You can borrow up to 80% LVR (80% of the value of the property) if you’ve been in the agreement for at least 12 months and have made perfect repayments for the last six months.
You can obtain a home loan with a specialist lender, typically at 2-3 percentage points above the Bank Standard Variable rate.
You can apply for a home loan immediately if you’ve paid off your Part IX debt agreement. You don’t have to wait five years for the debt agreement to clear off your credit file to apply.
Many lenders might accept your application only if you’ve been discharged from the debt agreement for up to two years.
Fortunately, we know non-conforming or specialist lenders that can accept your application if you have been discharged from a Part IX debt agreement for at least 12 months.
Furthermore, some of our lenders can consider your application one day after your discharge.
Call us at 1300 889 743 or fill in our free online assessment form to talk to our mortgage brokers!
When your debt agreement ends, your debts are considered settled, and you no longer have to make payments to those creditors. The agreement will remain on your credit report for up to five years, which may affect your credit score, but successfully completing it shows financial responsibility and can help rebuild your credit. Your name will also be removed from the National Personal Insolvency Index after a set period. You regain full control over your finances and assets, allowing you to borrow money and make financial decisions more freely.
