How To Find Relief From Your Debt
Posted November 14th, 2009 and last modified June 15th, 2011
About to give up? Pay your debts despite your financial troubles by talking to a financial counselor about your options.
Many Australians are facing dire financial circumstances and the employment situation is not turning around yet. Many free financial counselling services are available for those who need advice.
A system for controlling debt that has been recommended by many debt relief companies is to set up a debt agreement but in fact this can be an expensive option in the long run and will damage your credit history. This is explained further on.
Unemployment is playing a big role in the state of the credit industry and the end of 2009 and the beginning of 2010 is expected to see many more Australians made redundant.
For every $100 net earned by an Australian nearly $160 is owed in household debt with up to $400,000 being owned on credit card in some extreme cases. Up to 75% of cards are not fully paid off each month and are then accruing interest, many at a rate of interest between 18% and 19%.
On the positive side
Latest figures have shown that credit card debt is being reduced and that a strong savings pattern is emerging.
How to reduce your debt
* If you don’t know what you have coming in and what has to go out, ends will never meet, so make a budget with all your income and outgoings, remembering to allow for any monthly and annual costs
* Take steps to reduce expenses and increase household income – sell any assets that you can do without and if you have adult children in the house, ask for a contribution to household expenses
* Look at your expenses and see where you can trim some of the costs – there usually are ways to trim back expenses a little, even 10% makes a big difference – it could be petrol costs, food costs, entertainment costs
* After mortgage or rent payments, food is the next biggest cost and one of the easiest ways to save money with careful planning, tight budgeting and buying foods in season and on special
* When you have freed up some cash pay it off your cards as this will not only reduce the amount owed but will also reduce the interest that has to be paid
Obviously it is much better to trim costs now and have money in reserve than face financial problems should you lose your job.
If you do have a change to your income earning potential in the form of unemployment, sickness or accident, contact your lenders immediately and inform them of the situation. Talk to a financial counsellor who will be able to help you work through a solution. Don’t get behind in payments and then try to fix the problem.
One sure way to get further into trouble is to use one credit card to pay another. That is only compounding the problem.
Debt agreements are only the answer if you are at the desperate stage. They will damage your credit history and they are an expensive option.
Getting the help you need
The Big Four banks have put in place extra assistance to help people manage their debt over this period of financial uncertainty. If you are with a lender and you are struggling to make your repayments talk to the lender and discuss further options.
Perhaps there is the option to pay interest only for a while, or to extend the length of the loan, and thereby reducing repayments. Some credit cards have very high interest so if you do have one and need assistance, ask if the lender could switch you to a card with a lower interest rate or give you a personal loan to replace the credit card.
Financial services
Financial counsellors will not only discuss various options for you but will talk to the financial institutions on your behalf. This can be a very good step if you are a person who feels they cannot negotiate with lenders, but it is always a good idea to talk to them initially yourself if you can. Financial counsellors’ services are free, confidential and independent.
When you talk to staff of the lender you will mostly find them sympathetic and they will try and work through a solution with you. There are so many people suffering financially today that the staff are well trained to deal with these situations. You will probably find that it is not as daunting to talk to them as you thought.
Financial relief
Apart from credit card debt re-negotiation there are also other services that are offering debt relief. Below are listed some of the services that can help:
* Energy and telephones – you may be able to organise a flexible payment, several payments to cover the bill, or delayed date for payment
* Tax bills – the ATO will look at your situation and may be able to help in the form of a delayed payment or even relief from part or all of your tax debt
* StepUP Loan – this is a loan to help people who need funds to buy essential items like furniture, computers and second-hand motor vehicles. It is a low rate interest personal loan organised by The Good Shepherd Youth and Family Service together with the National Bank. The interest rate is 3.99% fixed for the term of the loan, with flexible repayments and no charge for fees.
* Loan schemes with no interest – there are several hundred community based organisations across Australia who will lend money to persons on a health care or pension card for essential household goods and medical equipment, with a repayment period of 12 to 12 months. Each organisation has its own lending criteria so that would have to be discussed on application.
* Early release of super – there is a possibility that if you are in dire circumstances and you have the threat of losing your house you may be able to access your superannuation. The possible problem here is that if you lose your house anyway at a later date, you have also lost your superannuation so this course of action needs care consideration.
Living expenses exceeding income
When someone is constantly using their credit card because they do not have enough money each week or month, it is quite often a case that their expenses exceed their income. If you are having difficulty in this way it is necessary to sit down and tally up your expenses against your income.
After having done this it shows that your expenses are exceeding your income then you either have to reduce expenses, or lift your income and do it immediately. Can you trim your expenses back under your income level?
What many people have found during this time of uncertain employment is that one of the parties has had to go bankrupt so that they can bring their overall living expenses back into line with their income. If only one party goes bankrupt then the other person can still maintain a good credit rating.
This is not a desirable step, but if you cannot see your way clear to having excess income then talk to a financial counsellor and get their opinion about how you can get back in control of your ins and outs.
Unavoidable actions
The Debt Agreement
If all your efforts have not solved the financial situation you are in then a consideration is a debt agreement. There are certain criteria that are necessary to qualify for a debt agreement and they are these:
* You have to be insolvent which means you are unable to pay your debts by their due date
* Your after tax income must be under $61,875
* You must not owe more than $82,500 in unsecured debts and you do not own more than that in assets
Under the terms of a Debt Agreement (DA) your debts are frozen, no more interest applies and you repay a set amount per week over three to five years.
Debt agreements are usually negotiated and administered by debt agreement administrators who broker a deal with your lenders on your behalf. In theory this appears to be sound but in actual fact the agreements often do not work because ‘unrealistic’ repayment figures are calculated by using an unrealistic budget meaning the repayments were unaffordable in the first place. Before long the person is defaulting on the debt agreement. Debt agreement administrators are required to set up a budget but if you find yourself in this situation go through the budget very carefully and ensure that it covers everything that you have to pay for during the whole year.
A debt agreement must be lodged with the Insolvency and Trustee Services Australia, the Government regulator. To make this a binding agreement the majority of your unsecured creditors need to agree to it. The amount to be paid back is usually between 25% and 75% of your debt, plus a set-up fee of about $2000 and an administration fee, such as 20% of the total amount which is paid to the debt administrator. There is also a government charge of 3.5%.
The process of the Debt Agreement means that it applies to your unsecured debts only, such as credit cards and personal loans. Assets such as your house or car can be repossessed if you default on their repayments. If you default on the debt agreement repayments your creditors can obtain an order to force you into bankruptcy.
Bankruptcy
There are benefits of going into bankruptcy rather than signing a Debt Agreement and the main one is the fact that you do not have to repay the debt.
The downside is that you are bankrupt for 3 years during which time you are only allowed to own limited assets. If you have substantial assets at the time of going bankrupt, the trustees will sell them to pay off your creditors. During the 3 years of bankruptcy any financial gains you acquire, such as an inheritance, will be lost. You will be allowed to earn an after tax income up to the current threshold (approximately $41,250 depending on your taxable circumstances) but after that 50% of your income will be taken to repay the debt.
With employment you are limited in that you cannot work in a job that requires the handling of money or which requires you to have a licence. If you want to travel overseas you will need to obtain the approval of your trustee.
Differences of opinion
Case Study
CHOICE has surveyed debt relief companies in an endeavour to find out what advice would be given to two mystery shoppers. Both claimed the same profiles but admitted to have different debt levels.
Their profile was:
* Single and no dependents
* Before tax income of $40,000
* Lived in 2 bedroom apartments
* Had missed their last 3 loan repayments
* No savings or substantial assets
* Owned a car, some superannuation and household items
Their debt level differences were:
1. 1st person owned $12,000 on two credit cards and her car was worth $6,000
2. 2nd person owed $40,000 with $28,000 of that on credit cards and secured car loan of $12,000. She was unemployed for three months but has since found employment. Her cars was worth $8,000
Enquiries from debt relief companies
Both of the mystery shoppers were advised to sign a debt agreement by the majority of companies. Other options of calling the lender, applying for a hardship variation, refinancing or bankruptcy, were suggested. The average phone calls were quite short.
The trend was to get all the financial details from the mystery shoppers and other personal relevant details then options were given to resolve the situation.
One company did suggest to mystery shopper #2 to submit all financial affairs to them and that once an agreement was in place her pay would go to them and they would send her money to live on and pay her bills, debt repayments and fees. The downside of this suggestion would be if the company sent insufficient money for her to live on this would make the situation even worse.
Various fees and quotes were given regarding a debt agreement.
From the financial counsellors
1. 1st person – a debt agreement is not a good option due the high costs and relatively low debt. Options could be to negotiate a reduction in repayments for a short period with the card providers and possibly get an interest reduction. Otherwise a personal loan consolidating the two could be a sensible option. Or sell the car and pay off some of the debt. Increase income by letting out the second bedroom.
2. 2nd person – bankruptcy could be an option which would allow a fresh start. The car finance company may allow her to keep that agreement going so long as she could make the repayments. The debt agreement is not a very good option because it would be for 5 years and any defaults would impact on the agreement causing it to fail.
To avoid bankruptcy in this situation an application for hardship variation may work because of her three months unemployment. There could also be an argument for ‘maladministration’ which means she was offered more money than she can reasonably afford to repay. If either of these two situations did not bring about the desired result a complaint could be made to the ombudsman.
Your Rights As A Consumer
The key with debt resolution is to act immediately.
Many people end up in debt because of circumstances beyond their control such as illness, family breakdown, employment and do not realise at the time that there could have been some renegotiation of debt taken place. The unfortunate and so common situation is that one of these circumstances may force a person into unexpected debt, then in an effort to get out of that situation they take on more debt but eventually ends up in bankruptcy because of not being able to meet commitments.
The Uniform Consumer Credit Code allows you to make an application for a hardship variation of your loan in case of temporary financial difficulties.<
If your lender is a bank Section 25 of the Code of Banking Practice will also apply to the loan agreement. ‘We will try to help you overcome your financial difficulties with any credit facility you have with us. We could, for example, work with you to develop a repayment plan.’
Should you have any financial problems where you can see your repayments being affected for a period of months it is prudent that you contact your financial institution sooner rather than later to discuss the situation.
If you find yourself in the situation where you cannot get a resolution and feel that you have been unfairly disadvantaged, then you can contact either of the free help of the Credit or Financial Ombudsman Services. You can also have your case considered by the relevant state tribunal or court.
Debt relief contacts
* Financial Ombudsman Service, 1300 780 808
* Credit Ombudsman Service, 1800 138 422
Financial counsellors
ACT
* Care Financial Counselling Service, 02 6257 1788
NSW
* Financial Counsellors Association of NSW
* Credit & Debt Hotline, 1800 808 488
* Consumer Credit Legal Centre
NT
* Anglicare, 08 8948 2700 (Alice Springs) or 08 8985 0000 (Darwin)
Queensland
* Financial Counselling Association of Queensland, 07 332 13192
SA
* The South Australian Financial Counsellors Association
Tasmania
* Anglicare, 03 6234 3510 or 1800 243 232
Victoria
* Consumer Affairs Victoria, 1300 55 8181
* Consumer Action Law Centre Victoria
WA
* Financial Counsellors Association of WA, 08 9325 1617
* Consumer Credit Legal Service
Useful websites
* Australian Securities & Investments Commission
* Wesley Mission
* Centrelink
* Insolvency and Trustee Service Australia
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