Debt agreements seem scary, especially if you’re in the financial position to be considering one. They’re really nothing to be afraid of though, as long as you know what you’re getting into.

Technically a debt agreement is an act of bankruptcy under the Bankruptcy Act of 1966, but it is not the same as declaring it. The difference being the agreement is described as being someone’s alternative to becoming bankrupt; it’s a fresh start without the social stigma (and financial implications) that come with being officially bankrupt. Someone that applies for a debt agreement cannot have a declaration of bankruptcy on their record.

Debt Agreements

Put simply, a debt agreement is a settlement deal made between yourself and your creditors so that you are able to afford your debts. If the majority of your creditors agree to the offer, interest on your debt is frozen and they cannot take new steps toward you in regards to you paying them. This means they can’t call or contact you after the agreement, asking you to make payment.

Debts that can be paid off under a debt agreement must be unsecured. This is the kind of debt that will not result in the repossession of your house, car or household items if you fail to pay. Some examples of unsecured debt are credit card debt, personal loans, medical bills, school fees and unpaid rent from previous tenancy. Secure debts include mortgages, car loans and fines.

In addition to taking care of multiple unsecured creditors, your repayments on the agreement are based on what you can reasonably afford and your amount owing will not change. If you’re able to afford a lump sum or would prefer a smaller, monthly payment – this can be arranged. Your debt agreement will also apply to a fixed period, between one and five years.

While engaged in a debt agreement, your access to further finance will be restricted so as to prevent you from getting further into debt. Once your debt agreement is paid off, you are free and clear of all the debt covered. If your credit rating is low, or if you’ve been previously refused finance through major lenders, you can still apply for a debt agreement.

Something to keep in mind is that your debt agreement will be recorded on a public register, and like bankruptcy, will show up on your credit history. However, once it’s paid off and providing there were no late payments, the arrangement will mean a fresh, debt-free start for you without black marks on your credit.