A formal debt agreement plan can be an effective debt strategy for some people, but it’s important to understand exactly how they work and what the implications are.
A Part 9 Debt Agreement (also known as a Part IX Debt Agreement) is a binding contract between you and your creditors (the people or companies to whom you owe money). It allows you to offer your creditors a reduced settlement based on a repayment amount you can afford. There are strict qualification criteria and the proposal must only include unsecured debts, such as credit cards, telephone bills and utilities. All of your unsecured debts must be included—there are no exceptions.
Should your proposal be accepted, no further interest will be incurred on the included debts. Your repayments will be fixed at a certain amount for a set period of time, usually up to five years. During that period, you will be protected from debt collectors and legal action associated with creditors who are party to the agreement.
It is important to note, however, that there are important consequences.
By proposing a formal debt agreement, the debtor (you) commits an act of bankruptcy. Should the proposal be rejected, creditors can use this information to force you into bankruptcy. Formal debt agreements are registered by the government, which would result in a record of your name appearing on the National Personal Insolvency Index for at least five years and a listing on your credit file for five years (these same consequences occur in bankruptcy). This can impact your ability to access credit.
The bottom-line is that you should not enter into a formal debt agreement without fully understanding the immediate and long-term consequences.