(03) 9020 2905Amid the hail of economic gunfire, it will be little comfort to some Australians that some sunshine is trying to poke through.
Banks are, selectively, lending again. Australia’s stockmarket is well off its bottom. Profits aren’t looking too bad. Inflation and interest rates are still low. And it all seems to have happened, as Con the Fruiterer would say, in a “couple-a-days. Bewdiful!”
Access Economics believes unemployment will peak at 7.5 per cent, instead of 8-9 per cent. That’s still another 200,000 Australians out of work within two years added to the hundreds of thousands who have already lost their jobs.
Personal balance sheets have been shattered. Individuals, small business owners, and households are still hurting like they’ve done a few rounds with Rocky Balboa.
Once upon a time, the easy option was “bankruptcy”. Way back when, you could quickly clear your debts, do a little time pretending to be in the poorhouse (a la Alan Bond) and you could be back in business again.
As far as holes went, Australia’s old bankruptcy laws made the script for Kevin Costner’s The Postman look worthy of a Pulitzer. Those gaps have been significantly closed.
A more attractive alternative is known as a “debt agreement”. It’s an admission to creditors that you’re in over your head and you need to negotiate a way out.
Under a debt agreement, you might not have to pay back the entire amount and you’ll get to pay it back interest free. However, if you fail to upkeep the agreement, you may still be sent into bankruptcy. But it is far less of a black mark against your name than bankruptcy.
Debt agreements have strict requirements.
- The debt must be less than $83,647.20.
- You must earn less than $62,735.40 after tax.
- The debts must be unsecured.
- You must be insolvent.
- You can’t have been a bankrupt or entered into a debt agreement in the last 10 years.
Unsecured debt is largely credit cards, personal loans and old rent or medical bills, for example. Insolvent means you owe more than you own. Total debts are higher than the value of all your junk.
Too many people go into bankruptcy for debts of less than $10,000, where a debt agreement would probably would much better.
Statistics show that debt agreements are most commonly taken out by people aged 25 to 45, with about two –thirds being taken out by men.
Let’s take the fictional William Bragg. William, who’s known to most, including his creditors, as Billy, has debts of $60,000. But the value of all his possessions, including his car, is $30,000.
Billy works as a musician and has earned approximately $40,000 a year after tax in recent years.
For some time, Billy has been going backwards after rent and general living expenses. He wasn’t ever able to repay any principal. Recently, he started hearing from creditors and he’s been juggling ever since.
On his debts, income and solvency, Billy would qualify for a debt agreement.
While he could organise the agreement himself, he is probably better off getting professionals debt agreement makers involved. Those companies will charge a fee, but will probably negotiate a far better deal with your creditors than you could on your own.
Billy organises a deal to pay creditors $30,000 of the $60,000, over four years, at $625 a month, with no interest, through one monthly payment.
What’s in it for your creditors? If you declared bankruptcy, they might get nothing, or only $5000 back. With a debt agreement, they are far more likely to get $30,000 back. They don’t have to accept the offer, however.
Roger Mendelson, chief executive of debt specialist Prushka, says the debt agreement industry has come a long way following regulation.
“There were a lot of cowboys in the industry for many years, but most of them have gone. They charged high fees – some fees were horrendous,’’ Mendelson said.
But that was largely because those making agreements could charge upfront fees. That meant they didn’t care whether the agreement worked or not.
“Now they have to share in the instalments with the creditors, which aligns their interests with making sure the deals are adhered to.”
Bruce Brammall is the author of Debt Man Walking (www.debtman.com.au) and director of Castellan Financial Consulting. Email: bruce@debtman.com.au