How to deal with debt
If you are struggling to keep up with your debt repayments, don’t try to ignore the problem or hope it will go away – take control of your situation.
Ignoring debt problems will makes things worse. Interest will probably continue to be charged on top of the debt and any possessions secured against the debt (eg your car) may be repossessed and sold. Also, your credit rating is likely to be affected and you might be sued.
Even if you think you cannot pay or you feel the situation is hopeless, you need to act. You do have options.
Here's some suggestions about how to deal with debts - contact a free and independent financial counsellor or your financial adviser to discuss them.
Why people get into financial difficulties
People get into financial difficulties for all sorts of reasons:
- Personal reasons: unemployment, illness, marriage or relationship breakdown
- Economic and business reasons: rising interest rates, business failure, poor investment decisions or fraud
- Poor financial management: living so close to the limit of your financial capacity that one mishap lands you in trouble, or borrowing too much on credit cards and store finance; or spending far more than you can safely afford.
What's your current financial position?
Use FIDO's Budget Planner to assess your current financial situation and your capacity to pay your creditors (the businesses or individuals to whom you owe money).
The basic questions are:
- what income do you have?
- what are your basic living costs?
- how much do you have left after deducting your basic costs from your income?
If you do have money left, then you can make offers to your creditors.
Increase your capacity to repay
Take some time to think about your income, expenses, assets and liabilities, and try to work out a budget so that you can meet your financial commitments when they are due. A free and independent financial counselling service may be able to help you with this process.
Here's 3 ways to improve your capacity to repay your debts:
- Increase your income
If you’re not able to work full-time, is part-time or casual work an option? If you have grown children living with you, should they be contributing more to household expenses?
- Reduce your expenditure
You may need to cut down your living expenses. Paying cash for basic items, not using a credit card, and so avoiding interest and fees, can help. For other tips on managing household expenses see:
- Sell assets
You may own household or personal items you no longer need. Consider a garage sale, selling assets that produce no income, or if necessary shares or investments to reduce debt.
| TIP! | Use FIDO's Budget Planner to assess your current financial situation and your capacity to pay your creditors (the businesses or individuals to whom you owe money). |
Find out if you are entitled to a pension, benefits or other government assistance
Visit the Centrelink website to see whether you have an entitlement. The site includes specific information for:
- carers, parents and guardians;
- unemployed, recent immigrants, students, trainees, self-employed and farmers;
- people in crisis, including recently separated, divorced or bereaved;
- ill, injured or people with a disability; and
- people planning to retire or needing help in retirement.
Go to http://www.centrelink.gov.au 
- see under Individuals and also check the A-Z index.
Vary loan repayments on hardship grounds
If you cannot keep up your debt repayments, you should contact your creditor (the person or business you owe money to) as soon as possible to discuss your situation. Try to agree on a repayment plan that you can manage.
Say you are having financial difficulties and want to discuss repayment arrangements. Offer only what you can really afford to pay, making sure you can offer something to all your creditors. Ask if they will agree to stop charging interest or reduce the interest on the debt.
A creditor may want details of your income and expenses, together with supporting documents. Although you do not have to do this, cooperating may improve your chances of reaching an agreement.
More on dealing with debt
Dealing with debt collectors
If you do reach an agreement, confirm it in writing and ask for a written reply. Remember to include any agreement about interest. Keep a copy of all your letters, faxes (including transmission reports), emails and notes (dated and signed by you) of any phone conversations.
Under the Consumer Credit Code, if you cannot keep up loan repayments because of temporary financial hardship through unemployment, sickness or other reasonable cause, you may have a right to reduce and spread your payments over a longer term, or halt them temporarily. You must be a consumer not a business borrower, however.
If your lender does not agree, you can apply to the Court or Tribunal that hears hardship applications in your State or Territory. You will have to show that you can repay the loan under the arrangements you propose.
Contact State Government Fair Trading or Consumer Affairs to find out more about hardship applications and other aspects of the Consumer Credit Code. In some States the agency may help you negotiate a variation with your lender or help you apply to the Court or Tribunal. Financial counsellors, consumer credit legal services and some State legal aid services can also help. See the Consumer Credit Code website for details.(www.creditcode.gov.au ).
| TIP! | Tips on preparing a repayment plan
Work out what you can reasonably offer, considering both your living costs and all your debts. Generally it's best to offer your creditors equal shares in proportion to what you owe, for example $10 per week for a $100 debt and $30 per week for a $300 debt. Make sure you cover any interest or charges applying to the debt. Give special attention to debts secured against your home, car or other assets because you may lose them unless you successfully negotiate with these creditors.
Consider seeking assistance from a financial counsellor or other adviser to help you develop a debt repayment plan, and to advise you about issues like dealing with secured creditors. |
Consolidate your debts
If you have a number of loans at different interest rates, you may think about consolidating all your loans and other debts into a single loan. Although this idea appeals strongly to people faced with a lot of creditors demanding payment, it is vital that you make sure it will be the best option for you in the long term. If you end up paying a higher rate of interest, extra fees and keep borrowing on your credit card, you will be even worse off.
Read FIDO's tips on what to watch out for if you're thinking about consolidating your debts
FIDO's multi-loan calculator shows a snapshot of your current loans and lets you check which of these three options might suit you:
- paying off your loans faster without extra money
- refinancing your loans or
- changing payments on selected loans.
Find out about court instalment orders
If you get sued in court for debts you owe and you:
- cannot pay in full, and
- cannot get your creditor to withdraw the claim and negotiate with you,
you can 'admit' the debt and apply to 'pay by instalments' through the Court. Ask the Court's civil registry staff to help you with this application or seek help from a financial counsellor.
If you apply for an instalment order, you must offer an amount high enough for the Court to accept it as reasonable, but low enough for you to keep up the repayments. If you fail to keep up repayments, the creditor can ask for the instalment order to be set aside and seek orders to garnishee your wages or to seize and sell your goods.
Bankruptcy and its alternatives: a last resort
If all else fails, applying for bankruptcy may be your best choice. (A creditor who has obtained a judgment against you may also apply to have you made a bankrupt.)
Bankruptcy releases you from most of the debts you owe at the time you apply and will get creditors off your back. However, you will lose your home and other assets, you may be forced to pay some of your income to the bankruptcy trustee and you may face other restrictions and potentially negative consequences. Get advice from a financial counsellor or legal service before you apply for bankruptcy.
Bankruptcy is administered by the Insolvency Trustee Service Australia (ITSA), a Commonwealth Government agency. Find out more at their website: www.itsa.gov.au .
Legal alternatives to bankruptcy that allow a debtor to settle their debts include:
- an informal arrangement with your creditors
- a Debt Agreement under Part 1X of the Bankruptcy Act; and
- a Part X Arrangement under the Bankruptcy Act.
Get help if you need it
Many people find money problems embarrassing, especially if they happen for reasons you prefer to keep private. However, you may need independent help to work out your financial position, your options and to negotiate with creditors. People often get help when:
- the financial situation is complex or they have lots of debts,
- they feel unable to cope, the situation seems hopeless, or
- creditors won't negotiate and threats of legal action or repossession of property have started.
Who can help?
Some people use an accountant or other paid adviser. Many people find a free and independent financial counselling service the best option.
Local community organisations may be able to help with food, food vouchers, electricity and gas payments in a crisis. Check with agencies such as LifeLine, Salvation Army and the Smith Family or your local neighbourhood centre. Also check what free help you can get from ITSA (www.itsa.gov.au) .
Businesses selling 'debt relief' services
Look for help from free services before you consider using one of these services. Consumer organisations have expressed concern about the quality and high cost of services offered by some businesses that charge people to prepare Debt Agreement applications and the like.
More about dealing with debt
FIDO Website: Printed 02/10/2010
