Work your way out of debt
Follow our six-point plan to get back in the black and out of financial strife
A COUPLE of things worry us about the increasing number of Australians getting into financial strife.
Firstly, we’re hearing reports that some financiers are getting quite aggressive with people who are falling behind in their loan repayments. Much of this is due to the higher repayments needed when borrowers are forced to switch from interestonly to principal-and-interest loans.
The other worry is numbers coming out of the National Debt Hotline showing a huge increase in calls for help, and the continuing boom in socalled payday loans which, while better regulated now, still charge very high interest rates. These are small loans to tide someone over until the next payday so they can buy essentials or meet a repayment on another debt.
It shows how tough it is for many people in financial crisis. Short-term high-interest loans are often a last resort for people who have run out of options.
We’re huge fans of organisations like financial counsellors associations (financialcounsellingaustralia. org.au), the Salvation Army’s Moneycare team and other notfor-profit organisations giving advice to those who need financial help.
They help people get out of financial trouble with solid advice and will work with the financier to sort things out.
Most people who get into financial trouble try and hide, and don’t ask for help. That is the wrong thing to do.
The home mortgage, car loan and credit card debt are the three areas where the most overcommitment occurs.
All counsellors agree that the first rule in coping with mounting debt is to contact your creditors as soon as things become difficult and attempt to negotiate a compromise. Far too many people conceal their financial problems until the situation gets out of control.
The key is not to get emotional – and we know that’s easier said than done – and to have a clear plan to follow.
With the help of counsellors and government consumer affairs officers, we have devised a six-point action plan to help deal with debt.
PRIORITISE DEBT
Have a clear understanding of what you owe: how much and the interest rate. Plan to get rid of the most expensive debt first, which is usually credit cards and payday loans.
NEGOTIATE PAYMENT
It is very expensive for creditors to start legal proceedings to recover a debt, so they prefer to work with you on how to repay the money.
The better prepared you are with a strong action plan, the more likely they are to work with you.
CONSOLIDATE LOANS
If you have multiple loans and credit cards, try to consolidate them into one loan at the lowest interest rate possible. Work with a financial counsellor to limit exit fees from existing loans and ensure the new facility is the best for your circumstances.
ACCESS SUPER UNDER FINANCIAL HARDSHIP PROVISIONS
In normal circumstances people are discouraged from withdrawing their super contributions, either by onerous tax penalties or legislative barriers. However,
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super fund trustees are allowed to consider all claims of financial hardship and can release superannuation money without penalty.
Working GET YOUR PLAN RIGHT
Getting help from others will depend on the quality of your plan, including:
• how much income you have coming in.
• out essentials: rent and mortgage, fuel and food.
• expenses against income. Cut costs, sell assets.
• income. Find extra work or check if you can claim Centrelink benefits.
• all arrears payments, loans and credit commitments. Some debts, such as rent or mortgage arrears, can cause more problems than others. Deal with these first.
• you have a financial statement showing all income and outgoings, decide how much you can pay off debts.
Seeing Balancing Increasing When CONTACT YOUR CREDITOR
Explain your situation and try Before considering bankruptcy, understand the rights and responsibilities. Advantages include:
● Creditors can’t approach bankrupts.
● Income is protected from recovery action up to certain amounts, to ensure you have enough money to survive.
● Assets are protected if essential, eg, your home, car, tools of trade and employer super contributions. Disadvantages include:
● Bankrupts come under the direction of a trustee who can control your personal financial affairs.
● Taking directorships in companies is not allowed.
● Passports may have to be surrendered.
● Borrowings are limited.
● Cheques cannot be written over a certain amount.
● Non-essential assets are at risk in recovery action, including property and private superannuation contributions.
to reach an agreement about what you will pay.
Many counsellors will advise going bankrupt only as a last resort.
Many will suggest a Debt Agreement (Part IX), which is a formal agreement to pay creditors and is not as onerous as bankruptcy. Discuss this option with a financial counsellor first.