Know Your Options before declaring bankruptcy: Debt Consolidation Loan

COVID 19 pandemic has made people realize, more than ever, that a cash flow disruption can occur to anyone, anytime, and without much warning. Not just that, sudden unforeseen liabilities like uncovered medical bills etc. can also creep up without you ever realizing it. If you don’t have enough contingency funds to cover the interest payments against your debts than you are in trouble. When this happens, an individual has to protect himself from un-relented demands of his/her creditors till he can put his/her finances back on track. One such protection provided by the law of the land is to declare bankruptcy. But it is the protection of last resort sort of, there are myriads of other options available too before you resort to declaring yourself bankrupt. Let’s face it, bankruptcy, although a perfectly legitimate way to protect yourself and to give yourself sometime to get back to solvency, is quite demoralizing psychologically and have its own associated costs. The Australian Financial Security Authority (AFSA) suggests following steps to protect your interests against your creditors apart from using protection under bankruptcy:

Temporary Debt Protection (TDP)

You can use this option to get a six months protection period to figure out your next steps and get help to be back on track with your finances. During this period your unsecured creditors (including sheriffs and other government authorities) are not allowed to pursue you. This effectively means that during this period no authority can seize your goods or make recovery from your wages

What to do during your protection time?

  • You can seek advice from your financial counsellor.
  • You can explain your situation to your creditors and can negotiate a payment plan. If you are not comfortable doing negotiation yourself, you can take help from your financial counsellor.
  • Do a deep dive on whether declaring formal bankruptcy would make sense for you.

If by any chance your financial problems are mainly due to tax burden its probably better that you seek advice from Australian Taxation Office. Also keep in mind that under TDP your secured creditors can still repossess those goods against which the loans were secured (such as house under mortgage).

Debts which are not covered by TDP

Some debts like child support, HELP debts, and fines imposed by court are not covered under TDP.

Debt Agreements

A debt agreement could be a flexible way to come to an understanding regarding rescheduling of your debt payments without resorting to bankruptcy. This is also known as Part IX (9) and is legally binding between you and your creditors. To be eligible for this, your debt and income must be below a specified limit. In a debt agreement you can do the following:

  • You can negotiate to pay that much which you can afford over a period of time. Normally a percentage of what you owe to the creditors.
  • You will send payments to your debt agreement administrator rather than your creditors.
  • Once payments are made and agreement ends, your creditors can’t bother you for the rest of the money. So, your creditors kind of agree to take a haircut in this agreement.

Why it works?

It is a win-win for both parties because normally people agree to pay more than what creditors can recover from them after they declare bankruptcy.

Consequences for you

It may impact your credit worthiness for any future credit requirements. Also, your name will appear on a public register for a limited time.

Personal Insolvency Agreements (PIA)

A PIA is known as part X(10) and is a legally binding agreement. Under this a trustee is appointed which takes control of your property and makes an offer to your creditors. This offer pertains to partial or full payments against your debts either in lumpsum or in several installments.

What you need to know pertaining to PIA?

  • The time period given to you to make your payments depends upon your trustee and its negotiation with your creditors.
  • There are no debts, assets, or income limits to be eligible for PIA unlike debt agreements.
  • You have to pay certain fees to cover processing, proposing and managing an agreement.
  • This agreement may leave out certain types of debts.
  • Its advisable that you speak to your financial counsellor before going into PIA.

What kinds of debts are covered?

Credits and store cards, pay day loans, unsecured personal loans, bills for gas, phone, electricity, and internet, unpaid rent, overdrawn bank account, fees for medical, legal and accounting.

What is not covered?

Debts you incur by fraud, debts under a maintenance agreement or order, HELP debts, court fines.
Anytime you face personal finance problems, its always advisable to speak to your licensed financial advisor. Beware of untrustworthy debt advisors. You can also contact National Debt Helpline on 1800 007 007. To check your eligibility for various options you can go to AFSA website, where you will be asked regarding the amount of money you owe, your income level, assets you own before suggesting you your main formal insolvency options under the Bankruptcy Act 1966. For urgent relief the best option is TDP which allows you some time to mull over your situation before going for other permanent options.