Warning: Part 9 Debt Agreements have serious consequences

Warning: Part 9 Debt Agreements have serious consequences

RateCity's content and research team is currently in the process of updating this article, and bringing the information in line with modern standards. Stay tuned for an amended resource in the coming weeks.

With Australia’s household debt-to-income ratio being one of the highest in the world, individuals and families are finding it harder than ever to keep up with their repayments.

Australians have debts across multiple sectors: home loans, car loans, personal loans, credit cards and more. Because the interest rates of all these debts vary, and because people can find it hard to manage multiple payments, some people are attracted to the idea of ‘debt consolidation’.

Debt consolidation is marketed as rolling all your debts into one debt, and paying this off in regular instalments. The idea of simplifying your repayments is good in theory – however, in practice, there are several issues to be aware of.

First and foremost, the term ‘debt consolidation’ has a definition that has changed over time. It used to refer to a debt consolidation loan where the aim was to get finance to cover all your outstanding debts and then to make one payment each month to pay these debts off.

Now, the definition of debt consolidation has broadened to cover entering a Part 9 Debt Agreement to pay off your debt. If you enter the term ‘debt consolidation’ into Google, instead of finding finance companies offering debt consolidation loans, you will find companies offering to set you up in a debt agreement.

How Part 9 Debt Agreements work

So, what exactly is a Part 9 Debt Agreement? Debt agreements are a legally binding type of personal insolvency, separate from bankruptcy, for those debtors with relatively small debts, low incomes and little property. The maximum amount of unsecured debt that you can roll into a debt agreement is currently $113,349.60.

Debt agreements now account for over one-third of all personal insolvencies in Australia.

Debt agreements are set out fully in Part IX (9) of the Bankruptcy Act 1966, and while they are not the same as becoming bankrupt, they have similar serious consequences to becoming bankrupt.

The first consequence is that you have committed an act of bankruptcy when you enter the debt agreement. That means your name will be entered on the National Personal Insolvency Index (NPII) for five years. This is a public and permanent electronic record of all personal insolvency proceedings in Australia.

Another serious consequence is that your debt agreement will be recorded in the Public Record section of your credit file for at least five years, and longer if things go wrong. Your credit score will be reduced to -999 or 0, depending on which credit file you’re looking at. You will not be able to go for finance at a normal interest rate until it comes off your credit file, five years later. While it is not discharged, it will be almost impossible to go for finance at all; when it is discharged, you may be able to get some finance, but at a higher interest rate. It is worth consulting a trusted finance or credit repair professional before you apply for any credit after you’ve got one of these agreements.

A further consequence occurs if you stop making payments towards your debt agreement. Non-payment for six months will lead to automatic termination of your debt agreement – but your credit file will continue to show the debt agreement until you do something about it. We have seen cases where people continue to have a debt agreement listing on their credit report 10 years after they entered the agreement.

Another thing to consider is debt agreements only deal with unsecured debts up to the value of $113,349.60. Unsecured debt is debt that does not have specific property (like a house or car) serving as security for the payment of the debt. You will still need to make payments towards any secured debts like your home or your car.

Did you know?

Each time you apply for finance, a credit enquiry will appear on your credit file indicating that you asked a particular credit organisation for money. Sometimes it says how much you asked for; sometimes it says $0. No matter what, it changes your credit file and reduces your score every time you go for finance, whether you get it or not. Click here to read more.

How to take out a Part 9 Debt Agreement

Taking out a debt agreement is relatively straightforward, if your information is in order and you fall within the relevant thresholds. Here are the steps:

  1. You file a debt agreement proposal with the Australian Financial Security Authority (AFSA), with the relevant consent and certification by an administrator
  2. AFSA assesses your proposal for processing
  3. AFSA then contacts your creditors, asking if they wish to accept the agreement (which offers them a reduced amount on the debts you owe)
  4. If your creditors accept the agreement, the debts listed in the agreement are called ‘provable debts’
  5. You are released from these debts when the agreement finishes
  6. Your creditors cannot take action to recover their debts once the agreement is accepted (so all the harassing letters and calls stop)
  7. You pay the administrator in regular instalments, and the administrator pays your creditors on your behalf
  8. The debt agreement ends when all agreed payments have been made, or if there is some failure in the process, or if you can’t comply with it

You usually enter a debt agreement with a registered debt agreement administrator. These administrators charge a hefty fee of up to 25 per cent to administer your debt agreement – and this fee is paid by you.

 

Part 9 Debt Agreements in action

Here’s an example of how a debt agreement works.

If you owed $75,000 for all your unsecured debts, the administrator would divide the $75,000 by 260 weeks (five years), which would mean you would pay $288.46 per week for five years to satisfy the agreement.

The administrator would then deduct the following fees:

  • $18,750 for themselves (25 per cent of $75,000)
  • $5,250 for the government (7 per cent of $75,000)

As a result, the administrators would make an offer of $51,000 to your creditors ($75,000 minus $18,750 minus $5,250). So, the difference between what you would pay and what your creditors would receive would be $24,000 – a very expensive agreement.

This huge financial incentive for administrators has led to some unethical practices in the industry.

Many of the agreements we see are not appropriate for the client’s circumstances.

Most of the people we speak to did not realise how these agreements would impact their credit report and prevent them from accessing finance for a five-year period.

Where debts are low, there are much better ways to negotiate with the companies you owe money to – including entering hardship variations on each of your accounts – and thereby stopping enforcement action.

Another viable alternative to debt agreements are informal arrangements whereby you have an accountant, credit repair specialist or financial counsellor negotiate an agreement with your creditors that involves you paying a percentage of your debt.

This will achieve the same result as a debt agreement but will avoid any negative data being listed on your credit report and will also avoid you paying exorbitant fees. We think it is better to put that money back into your hands.

If you have already entered a debt agreement, there is always the possibility that a credit repair specialist or financial counsellor can work to vary your debt agreement in circumstances where your situation has changed (for example, if you’ve lost your job). This could save you thousands of dollars and avoid your debt agreement being terminated because of non-payment, which would affect your credit report indefinitely.

Did you know?

One of the first ways to fix your credit problems is to stop applying for any type of finance. Wait for six to 12 months and then proceed. The longer the period of time away from your most recent enquiry, the better and the more favourable your score will be. Also, the more attractive you’ll be to future lenders. Click here to read more.

Don’t get pressured into entering a Part 9 Debt Agreement

To sum up, there are a lot of debt consolidation companies that are selling Part 9 Debt Agreements. They enter people into these agreements for as little as $7,000 worth of debt – with serious consequences for the people involved.

Debt consolidation companies charge large fees to set up these agreements (on top of the government fees). If you decide to go down this road, it pays to shop around and find the lowest fee you can. Even better, there are organisations that will do it for free.

One thing credit repair companies see regularly is how people’s financial position can completely change after they enter a Part 9 Debt Agreement – usually this change happens in two or three years, but sometimes within just a few months. Once somebody’s position has improved, they want to get some finance and repair their credit history. But debt agreements, like bankruptcies, cannot be removed from a credit file. Also, finance is almost impossible to get at a regular interest rate, if at all.

So, don’t rush into a Part 9 Debt Agreement. Don’t give in to high-pressure sales tactics.

Instead, do your research. Make sure you exhaust other alternatives before taking out the agreement. Alternatives include:

  • Get free help from a financial counsellor, and ask for advice based on your entire situation
  • Talk to each creditor and ask for hardship assistance
  • Talk to a credit repair company about your options with them and the consequences of non-payment

Most ethical credit repair companies would never encourage anyone to go down the path of a debt agreement as a form of debt consolidation.

Written by Dr Merrilyn and Carmel Mansfield

Dr Merrilyn Mansfield is the lead adjudicator and researcher for Princeville Credit Advocates. She is fascinated with the consumer laws that relate to credit reporting and in advocating for a consumer’s right to a correct credit report. She is in her final year of law. For more information call 1300 93 63 63.

Carmel Mansfield is a credit file specialist at Princeville Credit Advocates, currently working with clients to improve their credit score. She has also worked in complex case management at Princeville since 2010. She holds an economics degree from the University of Sydney and is a passionate consumer advocate.

Did you find this helpful? Why not share this article?

Advertisement

RateCity

Money Health Newsletter

Subscribe for news, tips and expert opinions to help you make smarter financial decisions

By signing up, you agree to the ratecity.com.au Privacy & Cookies Policy and Terms of Use, Disclaimer & Privacy Policy

Advertisement

Learn more about home loans

Remaining loan term

The length of time it will take to pay off your current home loan, based on the currently-entered mortgage balance, monthly repayment and interest rate.

Monthly Repayment

Your current monthly home loan repayment. To accurately calculate how much you could save, an accurate payment figure is required. If you are not certain, check your bank statement.

Interest Rate

Your current home loan interest rate. To accurately calculate how much you could save, an accurate interest figure is required. If you are not certain, check your bank statement or log into your mortgage account.

How can I get ANZ home loan pre-approval?

Shopping for a new home is an exciting experience and getting a pre-approval on the loan may give you the peace of mind that you are looking at properties within your budget. 

At the time of applying for the ANZ Bank home loan pre-approval, you will be required to provide proof of employment and income, along with records of your savings and debts.

An ANZ home loan pre-approval time frame is usually up to three months. However, being pre-approved doesn’t necessarily mean you will get your home loan. Other factors could lead to your home loan application being rejected, even with a prior pre-approval. Some factors include the property evaluation not meeting the bank’s criteria or a change in your financial circumstances.

You can make an application for ANZ home loan pre-approval online or call on 1800100641 Mon-Fri 8.00 am to 8.00 pm (AEST).

What is a credit file?

A comprehensive summary of your credit history from an authorised credit reporting agency.

It includes your credit details, credit taken in the last five years, any default payments or credit infringements, arrears, repayment history, bankruptcy filings and a list of credit applications (including unapproved credit applications) in addition to your personal details.

Savings over

Select a number of years to see how much money you can save with different home loans over time.

e.g. To see how much you could save in two years by switching mortgages,  set the slider to 2.

How long does NAB home loan approval take?

The time required to get your home loan from NAB approved can vary based on a number of factors involved in the application process. 

Once you have applied for a home loan, a NAB specialist will contact you within 24 hours over the phone to take down relevant information, including your total income, debts (existing loans, credit cards, etc.), assets (car, shares, etc.), and your monthly expenses (food, utility bills, etc.). Your lender might also ask for information related to the property you want to purchase, including the type of dwelling and preferred postcode.

NAB will then verify all your information and check your credit score, and if the details stack up, you should be given a conditional approval certificate. This certificate stipulates how much money NAB is willing to lend you and is typically valid for 90 days. 

Once you have your conditional approval, you can start browsing for properties that you like and that fit within the budget that NAB has provided. After you find a suitable property, you’ll need to give a copy of the signed deed to NAB, following which you should get full approval and access to the funds. This process can take up to 4-6 weeks. 

Can I take a personal loan after a home loan?

Are you struggling to pay the deposit for your dream home? A personal loan can help you pay the deposit. The question that may arise in your mind is can I take a home loan after a personal loan, or can you take a personal loan at the same time as a home loan, as it is. The answer is that, yes, provided you can meet the general eligibility criteria for both a personal loan and a home loan, your application should be approved. Those eligibility criteria may include:

  • Higher-income to show repayment capability for both the loans
  • Clear credit history with no delays in bill payments or defaults on debts
  • Zero or minimal current outstanding debt
  • Some amount of savings
  • Proven rent history will be positively perceived by the lenders

A personal loan after or during a home loan may impact serviceability, however, as the numbers can seriously add up. Every loan you avail of increases your monthly installments and the amount you use to repay the personal loan will be considered to lower the money available for the repayment of your home loan.

As to whether you can get a personal loan after your home loan, the answer is a very likely "yes", though it does come with a caveat: as long as you can show sufficient income to repay both the loans on time, you should be able to get that personal loan approved. A personal loan can also help to improve your credit score showing financial discipline and responsibility, which may benefit you with more favorable terms for your home loan.

How to break up with your mortgage broker

If you find a mortgage broker giving you generic advice or trying to sell you a competitive offer from an unsuitable lender, you might be better off  breaking up with the mortgage broker and consulting someone else. Breaking up with a mortgage broker can be done over the phone, or via email. You can also raise a complaint, either with the broker’s aggregator or with the Australian Financial Complaints Authority as necessary.

As licensed industry professionals, mortgage brokers have the responsibility of giving you accurate advice so that you know what to expect when you apply for a home loan. You may have approached the mortgage broker, for instance, because you have questions about the terms of a home loan a lender offered you. 

You should remember that mortgage brokers are obliged by law to act in your best interests and as part of complying with The Australian Securities and Investments Commission’s (ASIC) regulations. If you feel you didn’t get the right advice from the mortgage broker, or that you lost money as a result of accepting the broker’s suggestions regarding a lender or home loan offer, you can file a complaint with the ASIC and seek compensation. 

When you first speak to a mortgage broker, consider asking them about their Lender Panel, which is the list of lenders they usually recommend and who may pay them a commission. This information can help you decide if the advice they give you has anything to do with the remuneration they may receive from one or more lenders.

How much deposit do I need for a home loan from NAB?

The right deposit size to get a home loan with an Australian lender will depend on the lender’s eligibility criteria and the value of your property.

Generally, lenders look favourably on applicants who save up a 20 per cent deposit for their property This also means applicants do not have to pay Lenders Mortgage Insurance (LMI). However, you may still be able to obtain a mortgage with a 10 - 15 per cent deposit.  

Keep in mind that NAB is one of the participating lenders for the First Home Loan Deposit Scheme, which allows eligible borrowers to buy a property with as low as a 5 per cent deposit without paying the LMI. The Federal Government guarantees up to 15 per cent of the deposit to help first-timers to become homeowners.

Do mortgage brokers need a consumer credit license?

In Australia, mortgage brokers are defined by law as being credit service or assistance providers, meaning that they help borrowers connect with lenders. Mortgage brokers may not always need a consumer credit license however if they’re operating solo they will need an Australian Credit License (ACL). Further, they may also need to comply with requirements asking them to mention their license number in full.

Some mortgage brokers can be “credit representatives”, or franchisees of a mortgage aggregator. In this case, if the aggregator has a license, the mortgage broker need not have one. The reasoning for this is that the franchise agreement usually requires mortgage brokers to comply with the laws applicable to the aggregator. If you’re speaking to a mortgage broker, you can ask them if they receive commissions from lenders, which is a good indicator that they need to be licensed. Consider requesting their license details if they don’t give you the details beforehand. 

You should remember that such a license protects you if you’re given incorrect or misleading advice that results in a home loan application rejection or any financial loss. Brokers are regulated by the Australian Securities & Investment Commission (ASIC), as per the National Consumer Credit Protection (NCCP) Act. 

What are the responsibilities of a mortgage broker?

Mortgage brokers act as the go-between for borrowers looking for a home loan and the lenders offering the loan. They offer personalised advice to help borrowers choose the right home loan for their needs.

In Australia, mortgage brokers are required by law to carry an Australian Credit License (ACL) if they offer credit assistance services. Which is the legal term for guidance regarding the different kinds of credit offered by lenders, including home loan mortgages. They may not need this license if they are working for an aggregator, for instance, as a franchisee. In both these situations, they need to comply with the regulations laid down by the Australian Securities and Investments Commission (ASIC).

These regulations, which are stipulated by Australian legislation, require mortgage brokers to comply with what are called “responsible lending” and “best interest” obligations. Responsible lending obligations mean brokers have to suggest “suitable” home loans. This means loans that you can easily qualify for,  actually meet your needs, and don’t prove unnecessarily challenging for you.

Starting 1 January 2021, mortgage brokers must comply with best interest obligations in addition to responsible lending obligations. These require mortgage brokers to act in the best interest of their customers and also requires them to prioritise their customers’ interests over their own. For instance, a mortgage broker may not recommend a lender who gives them a commission if that lender’s home loan offer does not benefit that particular customer.

How often is your data updated?

We work closely with lenders to get updates as quick as possible, with updates made the same day wherever possible.

What is the flexibility score?

Today’s home loans often try to lure borrowers with a range of flexible features, including offset accounts, redraw facilities, repayment frequency options, repayment holidays, split loan options and portability. Real Time Ratings™ weights each of these features based on popularity and gives loans a ‘flexibility score’ based on how much they cater to borrowers’ needs over time. The aim is to give a higher score to loans which give borrowers more features and options.