Informal debt agreements are a flexible solution for Australians who are experiencing financial stress. But they’re not without risk.
Informal debt agreements are becoming more important in Australia to manage finances due to the high cost of living. These agreements can provide short-term relief from payments, but they do not offer strong legal protection and can involve significant risks.
In this article, we discuss what informal debt agreements are and when you should use these agreements.
What exactly are Informal Debt Agreements?
An informal debt agreement is a private deal between a debtor and their creditor. It is not backed by law and does not involve the court or the Australian Financial Security Authority (AFSA). Standard features of informal debt agreements include
● Reduced repayment terms
● A pause on interest charges
● Flexible payment plans that suit the debtor’s financial capacity.
This makes them attractive to people who want to manage their debts without the profound and lasting effects of formal options, such as bankruptcy under the Bankruptcy Act 1966 (Cth). These agreements do not offer legal protection.
Both the debtor and the creditor must depend on trust and open communication. While this gives freedom to set terms that suit both sides, it also brings risks. If the details are not written clearly or are not fully understood, it can create issues shortly. This is why clear records and proper agreements are so crucial in informal debt arrangements.
Legal Differences Between Formal and Informal Agreements
Formal debt agreements offer robust legal protections for debtors as they proceed through Part IX of the bankruptcy process.
● Creditors pause all enforcement and collection actions.
● Agreements are legally binding and enforceable.
● It is governed by the Australian Financial Security Authority (AFSA).
● Clear rights and obligations are defined.
Informal agreements are flexible, but they lack the certainty of formal options. The debtor and the creditor both need to keep clear and honest communication in order to prevent confusion or any arguments about the repayment plan.
● Not legally enforceable or protected by law.
● Creditors can resume collection or legal action at any time.
● There is no guarantee of protection from repossession or court action.
● Rely heavily on trust and communication.
● There is no official supervision or external body to monitor compliance.
Risks of Informal Debt Agreements
These agreements are often seen as being simpler than formal ones, but they carry significant legal risk because of their lack of legal enforcement and potential for creditor action.
● Either party can cancel them at any time without notice.
● Creditors can change terms or withdraw at will.
● There is no legal recourse option if creditors begin legal proceedings.
● Missed payments often lead to negative credit listings.
● Informal agreements are often managed by buy-to-repair companies or debt negotiators, who usually have unclear contracts or high fees.
When Informal Agreements Might Be Appropriate
Informal debt agreements carry risks, but they can be beneficial in some instances.
● They are best for small or short-term debts when you can repay them without going through formal insolvency.
● These agreements are also beneficial for individuals who want to protect their credit score, as they do not appear on credit reports or insolvency records.
Services like JustBudget guide people through these non-binding deals. A professional negotiator can also help set fair and realistic terms. This ensures everything is written down and easy to track, which reduces the likelihood of confusion later.
Tips for Managing Informal Debt Safely
You must follow precautions to manage informal debt agreements with confidence.
Always put an agreement in writing.
Even a simple one-page agreement with essential details, such as terms and timeline, helps. A text or email outlining the deal is also acceptable.
Include a repayment schedule.
Don’t say ‘sometimes’. Set specific dates and amounts. Choose a payment method that suits you. For example, a bank transfer leaves digital evidence.
Have a clear amount and interest.
Don’t leave room for assumption. Spell out amounts and when payments are due. Mention interest if applicable.
Consult a lawyer for bigger loans.
A lawyer can draft or review the agreement if you’re lending thousands or over a long term. Be aware of debt consolidation scams posing as legitimate budgeting help. These can increase total debt exposure.
Informal debt agreements are a flexible solution for Australians who are experiencing financial stress. But they’re not without risk. These contracts need to be carefully considered, documented, and negotiated. Asking for assistance from a financial counsellor or lawyer is a safe step to regain control without worsening the problem.
Join the conversation!