A Qld Debt Agreement company has been referred to the Australian Financial Security Authority (AFSA) for allegedly misleading vulnerable persons through advertisements dispensed at ATM machines.
The “dodgy” advert pushes Debt Agreements as an alternative to bankruptcy and promises “no dodgy quick fixes, costly loans, no obligations, a solution and no more stress”.
A Debt Agreement is a formal alternative to bankruptcy however there is an argument that most debtors rarely end up better off by entering into one.
Not only do debtors have to pay the often exorbitant fees of a Debt Administrator, but they are also required by the Agreement to repay most of the outstanding debt, usually over a 3 – 5 year time frame, which is longer than the vast majority of bankruptcies.
And despite all this effort, the debtors’ credit rating is ruined.
The Consumer Action Law Centre referred the case to AFSA, because of its concerns that the advertisement targets people at their most vulnerable time. It was also concerned that the advertisement was misleading those in need by making promises that are simply not true. So let’s take a look at what the fuss is about.
Debt Agreement – Are they a Real Alternative to Bankruptcy?
A Debt Agreement is a formal alternative to bankruptcy that operates under Part IX of the Bankruptcy Act.
While a Debt Agreement allows a debtor to compromise and discharge outstanding debts, they do;
- Negatively impact a persons’ credit rating for at least 7 years.
- Result in a life time listing on the National Personal Insolvency Index
- Make obtaining finance and rental accommodation far more difficult
- Impose a range of onerous obligations on the debtor.
- Cause stress and hardship on many debtors
- Operate over a period of many years and often much longer than bankruptcy
- Require a debtor to repay the bulk of the outstanding debt
- Cost substantially more than the process of bankruptcy
Entering into a Debt Agreement is an act of Bankruptcy and as such, if a debtor fails to complete the agreement, creditors can move towards bankruptcy immediately.
Under a Debt agreement, the debtor is required to pay a substantial proportion of their income towards their outstanding debts. Such payments are not required in bankruptcy unless certain income levels have been exceeded.
This means, bankruptcy is often a better alternative for people with a limited income as all their earnings can be directed towards food, rent and other day to day living expenses rather than toward the repayment of old debt.
Debt Agreement or Bankruptcy – What Are the advantages?
Considering the above, one might ask why would anyone enter into a Debt Agreement.
Perception! People believe Bankruptcy to be something that it’s not.
So let’s examine some of the things people believe about bankruptcy that are not true.
- People believe that bankruptcy places limits on the amount of income you can earn – but this is not true. There are no limits and people are encouraged to earn as much as possible.
- They believe that bankruptcy will result in the loss of their jobs – but again this is not true. There are very few occupations that are affected by bankruptcy.
- They believe everyone will know they are bankrupt – but bankruptcy is not advertised. Employers won’t know about it.
- They believe they will not be able to travel overseas – but this is possible with permission of the bankruptcy trustee
- They believe they will lose their clothing, their possessions, tv, furniture, car etc – but again, this is not true – a person who is bankrupt can normally keep all these assets with only certain limits on cars.
In bankruptcy as in a Debt Agreement, credit rating is negatively impacted. Equity in major assets such as a house will be taken or accessed for the benefit of creditors.
So what is the benefit of a Debt Agreement? According to the promoters the benefits include;
- Formal bankruptcy is avoided
- All creditors are bound by the Formal Agreement so long as it is being complied with.
- One monthly payment is required to deal with all creditor claims.
- The debtor no longer has to deal with irate creditors
- Interest accumulation on debts generally stops
- A release from any on-going obligations to the creditors occurs automatically if the agreement is fulfilled.
As in bankruptcy, there is generally no effect on employment.
Debt Agreement Eligibility criteria
If after considering the above, a person still wishes to pursue a Debt Agreement, they must qualify for the process by having;
- Unsecured Debts of less than $106,561.00; or
- Assets less than $106,561.00; or
- Income in the next 12 months less than $79,920.75 (after tax).
If a debtors’ position exceeds the above, they may be eligible Personal Insolvency Agreement. As with a Debt Agreement, a PIA is also a formal alternative to personal Bankruptcy but for people with greater levels of income, assets and debt.
A Final Note
This story highlights a sad fact – people are vulnerable when they are experiencing financial difficulties and while there are many organisations wishing to do good, such as the Consumer Action Law Centre and The Insolvency Experts, there are many more that look to profit from your weakness.
No matter how difficult the financial situation, you have options that are available to you, but it is up to you to seek the truth and proper advice and assistance. When you are in trouble, the most important thing you can do is gather information, be critical of that information and consider all the alternatives in order to determine which course of action will be best for you.
This article is not to be construed as legal advice but is presented for information and research purposes only. No guarantee implied or expressed is given in respect of the information provided and accordingly no responsibility is taken by The Insolvency Experts or any member of the company for any loss resulting from any error or omission contained within this article.