What Is An Informal Agreement?

If you’re trying to overcome your struggle with debt, you’re not alone. It can feel like you’re constantly pushing up a mountain, never getting over the top. An informal payment agreement is one of the many types of debt solutions that reduces this burden, helping you achieve your financial goals.

However, there’s a lot of confusion around informal agreements and how they work. This is a type of agreement that enables the debtor to pay off their debts without a formal, legally binding agreement. Because it’s more casual, it can be a better choice for your credit rating and financial wellness. Still, you need to know exactly what you’re agreeing to before you decide if an informal agreement is right for you.

How Does an Informal Agreement Work?

First, let’s answer the biggest question about how informal agreements work. This is a type of agreement between a lender and a debtor. It allows the debtor to pay all or most of the debt they owe. However, unlike a formal debt agreement, there is no legally binding contract. This means you can avoid any long-term damage to your credit rating or black marks on your account statement.

Another way to think of this is as a mutual agreement with your lender. Your lender hopes to make as much money back from your debt as possible. On the other hand, you’re also ready to get out from under the burden of what you owe. You might agree to pay all or most of your debts upfront in a single lump sum as part of an informal agreement. This is a mutually beneficial situation for both you and your lender.

If you’ve fallen behind on payments, this might be something your lender agrees to in order to avoid the costly court process. Remember, your lender is in the business of making money. They want to work with you to make sure they make as much back as possible.

Does an Informal Agreement Help Your Debt?

With that in mind, how does an informal agreement help with your debt, if at all? Like all types of debt solutions, you have to consider the big picture. Compared to alternatives (like bankruptcy), an informal agreement is a best-case scenario solution. Here’s why:

  • Payment flexibility: Many lenders who are open to these types of arrangements will also allow payment extensions, especially if this is only a short-term problem.
  • Reduce payment: Most importantly, informal agreements can result in paying less than you owe, effectively lessening your debt.
  • Interest negotiation: An informal agreement can also be a chance to negotiate a better or zero interest rate, saving you money over time.
  • Avoid credit pitfalls: Most importantly, an informal agreement is a way to avoid any black marks on your credit statement. A bankruptcy, for example, has a lasting, harsh impact on your credit.

The Difference Between an Informal Agreement and Part 9 Debt Agreement

Many people confuse informal agreements with another type of debt relief: Part 9 Debt Agreements. There are key differences you need to recognise, the most important relating to a court of law. A Part 9 Debt Agreement is enacted with Commonwealth legislation. Conversely, an informal agreement is done privately between two parties without legislation.

Because an informal agreement isn’t legally binding, it can carry more risks. There’s always the chance that your lender won’t follow through with their side of the bargain. Similarly, the lender faces the risk that the borrower won’t pay up. However, you avoid the impact on your credit rating by choosing an informal agreement vs. Part 9 Debt Agreement.

It’s more likely to see an informal agreement used in less serious debt situations. For those who temporarily need relief or who wish to pay their debt quickly, this is more likely a better option. If you’re facing long-term, serious debts, you will likely need to consider something more structured and trustworthy than an informal agreement.

What Debt Relief Option Should You Choose?

Ultimately, there is no right or wrong answer about which type of debt solution you should choose. It’s highly dependent on your particular situation, your wishes, and your long-term goals. In most cases, you will need the guidance of a debt professional. Because your finances and credit rating are at risk, you don’t want to risk going through this process alone.

Not sure where to begin? The team at Debt Busters are here to help. While an informal debt agreement can be a great tool, it’s not for everyone. Additionally, you need a strong expert behind you to lead the negotiations with your creditors, ensuring the best-case outcome. As you know, every person and debt is different. We’re here to help you when you need it the most. Call us today on 1300 368 322.

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