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.

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Learn more about home loans

When do mortgage payments start after settlement?

Generally speaking, your first mortgage payment falls due one month after the settlement date. However, this may vary based on your mortgage terms. You can check the exact date by contacting your lender.

Usually your settlement agent will meet the seller’s representatives to exchange documents at an agreed place and time. The balance purchase price is paid to the seller. The lender will register a mortgage against your title and give you the funds to purchase the new home.

Once the settlement process is complete, the lender allows you to draw down the loan. The loan amount is debited from your loan account. As soon as the settlement paperwork is sorted, you can collect the keys to your new home and work your way through the moving-in checklist.

Cash or mortgage – which is more suitable to buy an investment property?

Deciding whether to buy an investment property with cash or a mortgage is a matter or personal choice and will often depend on your financial situation. Using cash may seem logical if you have the money in reserve and it can allow you to later use the equity in your home. However, there may be other factors to think about, such as whether there are other debts to pay down and whether it will tie up all of your spare cash. Again, it’s a personal choice and may be worth seeking personal advice.

A mortgage is a popular option for people who don’t have enough cash in the bank to pay for an investment property. Sometimes when you take out a mortgage you can offset your loan interest against the rental income you may earn. The rental income can also help to pay down the loan.

What are the features of home loans for expats from Westpac?

If you’re an Australian citizen living and working abroad, you can borrow to buy a property in Australia. With a Westpac non-resident home loan, you can borrow up to 80 per cent of the property value to purchase a property whilst living overseas. The minimum loan amount for these loans is $25,000, with a maximum loan term of 30 years.

The interest rates and other fees for Westpac non-resident home loans are the same as regular home loans offered to borrowers living in Australia. You’ll have to submit proof of income, six-month bank statements, an employment letter, and your last two payslips. You may also be required to submit a copy of your passport and visa that shows you’re allowed to live and work abroad.

How to use the ME Bank reverse mortgage calculator?

You can access the equity in your home to help you fund your needs during your senior years. A ME Bank reverse mortgage allows you to tap into the equity you’ve built up in your home while you continue living in your house. You can also use the funds to pay for your move to a retirement home and repay the loan when you sell the property.

Generally, if you’re 60 years old, you can borrow up to 15 per cent of the property value. If you are older than 75 years, the amount you can access increases to up to 30 per cent. You can use a reverse mortgage calculator to know how much you can borrow.

To take out a ME Bank reverse mortgage, you’ll need to provide information like your age, type of property – house or an apartment, postcode, and the estimated market value of the property. The loan to value ratio (LVR) is calculated based on your age and the property’s value.

How is interest charged on a reverse mortgage from IMB Bank?

An IMB Bank reverse mortgage allows you to borrow against your home equity. You can draw down the loan amount as a lump sum, regular income stream, line of credit or a combination. The interest can either be fixed or variable. To understand the current rates, you can check the lender’s website.

No repayments are required as long as you live in the home. If you sell it or move to a senior living facility, the loan must be repaid in full. In some cases, this can also happen after you have died. Generally, the interest rates for reverse mortgages are higher than regular mortgage loans.

The interest is added to the loan amount and it is compounded. It means you’ll pay interest on the interest you accrue. Therefore, the longer you have the loan, the higher is the interest and the amount you’ll have to repay.

What do people do with a Macquarie Bank reverse?

There are a number of ways people use a Macquarie Bank reverse mortgage. Below are some reasons borrowers tend to release their home’s equity via a reverse mortgage:

  • To top up superannuation or pension income to pay for monthly bills;
  • To consolidate and repay high-interest debt like credit cards or personal loans;
  • To fund renovations, repairs or upgrades to their home
  • To help your children or grandkids through financial difficulties. 

While there are no limitations on how you can use a Macquarie reverse mortgage loan, a reverse mortgage is not right for all borrowers. Reverse mortgages compound the interest, which means you end up paying interest on your interest. They can also affect your entitlement to things like the pension It’s important to think carefully, read up and speak with your family before you apply for a reverse mortgage.

When does Commonwealth Bank charge an early exit fee?

When you take out a fixed interest home loan with the Commonwealth Bank, you’re able to lock the interest for a particular period. If the rates change during this period, your repayments remain unchanged. If you break the loan during the fixed interest period, you’ll have to pay the Commonwealth Bank home loan early exit fee and an administrative fee.

The Early Repayment Adjustment (ERA) and Administrative fees are applicable in the following instances:

  • If you switch your loan from fixed interest to variable rate
  • When you apply for a top-up home loan
  • If you repay over and above the annual threshold limit, which is $10,000 per year during the fixed interest period
  • When you prepay the entire outstanding loan balance before the end of the fixed interest duration.

The fee calculation depends on the interest rates, the amount you’ve repaid and the loan size. You can contact the lender to understand more about what you may have to pay. 

Can I get a home loan if I owe taxes?

Owing money to the Australian Tax Office is not an ideal situation, but it doesn’t mean you cannot qualify for a home loan. Lenders will take into account your tax debt, your history of repaying the debt and your other financial circumstances, while reviewing your home loan application. 

While some banks may not look favourably upon your debt to the ATO, some non-bank lenders may be willing to help. They will look into the reasons for your tax debt and also take into account the steps you have taken to repay it before deciding whether to offer you the loan or not. Having said that, there are no guarantees - it depends on your whole financial picture.

Here are a few steps that you can take to improve your chances of getting approved for a home loan.

  • Demonstrate evidence of income.
  • Manage your debt by paying it off in installments.
  • Offer an explanation for your tax debt and a plan to pay it off.
  • Do what you can to stay out of court or attract debt collection agencies.


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.

Why does Westpac charge an early termination fee for home loans?

The Westpac home loan early termination fee or break cost is applicable if you have a fixed rate home loan and repay part of or the whole outstanding amount before the fixed period ends. If you’re switching between products before the fixed period ends, you’ll pay a switching break cost and an administrative fee. 

The Westpac home loan early termination fee may not apply if you repay an amount below the prepayment threshold. The prepayment threshold is the amount Westpac allows you to repay during the fixed period outside your regular repayments.

Westpac charges this fee because when you take out a home loan, the bank borrows the funds with wholesale rates available to banks and lenders. Westpac will then work out your interest rate based on you making regular repayments for a fixed period. If you repay before this period ends, the lender may incur a loss if there is any change in the wholesale rate of interest.

What is breach of contract?

A failure to follow all or part of a contract or breaking the conditions of a contract without any legal excuse. A breach of contract can be material, minor, actual or anticipatory, depending on the severity of the breaches and their material impact.

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.

How can I avoid mortgage insurance?

Lenders mortgage insurance (LMI) can be avoided by having a substantial deposit saved up before you apply for a loan, usually around 20 per cent or more (or a LVR of 80 per cent or less). This amount needs to be considered genuine savings by your lender so it has to have been in your account for three months rather than a lump sum that has just been deposited.

Some lenders may even require a six months saving history so the best way to ensure you don’t end up paying LMI is to plan ahead for your home loan and save regularly.

Tip: You can use RateCity mortgage repayment calculator to calculate your LMI based on your borrowing profile

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.