Consolidating your debt

Should you pay to have your debt administered?
 
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01 .Misleading marketing

Debt-Consolidation-LEAD

By using a debt consolidation business you could end up paying more in the long run than you would dealing directly with the creditors.

Debt consolidation businesses advertise themselves as a quick way to get the monkey off your back, but you could end up paying more in the long run than you would dealing directly with the creditors. Your credit rating might take a blow, too. Transparency and trust are the main issues at stake. 

CHOICE called a number of debt consolidation agencies to ask about fees, but we were told the information would only be made available after we'd surrendered a raft of personal details and, in effect, registered with the company and agreed on a plan.

Talking to a financial counsellor first is always a better idea than going through a debt consolidation business. A list of counsellors in your state is on the website of the Insolvency and Trustee Service Australia. You can also check the services listed on Financial Counselling Australia.

For more information about managing debt, see our Borrowing section.

Predators afoot

A certain breed of brokers and lenders preys on consumers desperate to keep their homes. The insidious practice of “equity stripping” has seen homeowners surrender up to 20% of the equity in their homes in fees for new loans before they understood they'd been had. Worse, interest can skyrocket to as much as 50% in the case of default. 

In some cases, the best strategy is to sell your home on your own terms and downsize your living arrangements rather than let your creditor sell it.

You can easily end up paying more than you borrowed, interest included.
- Saskia ten Dam, Financial counsellor

Saskia ten Dam, a long-serving financial counsellor at Townsville Legal Service, says most businesses that advertise themselves as debt consolidators are actually just debt agreement administrators operating under Part IX of the Bankruptcy Act – something you could negotiate with your creditors on your own. Unlike bona fide banks, they can't provide consolidation loans and charge interest, so resort to hefty fees.

“I've seen upfront fees of $2000 followed by $200 fortnightly or even weekly payments,” she says. 

“And the debtors often have no idea what they're going to end up paying over the long term. The payment period could be up to seven years or more – there's really no restriction, and there's no guarantee the creditor will be satisfied."

“A lot of these businesses tell you to stop paying your creditors while they put the deal together, but you can't get any information about what it's going to cost until you sign up, and you have to pay a big fee to do that. You can easily end up paying more than you borrowed, interest included."

Movement overseas

In the US, where debt is high and there's an endless supply of predatory financial practices, the Federal Trade Commission (FTC) recently shut down a “robo-caller” debt-collection operation that netted $13m by promising to dramatically reduce credit card interest rates for a $995 fee. The scam violated an October 2010 FTC ruling against telephone-based debt consolidation companies charging upfront before doing anything about the debt. (The scammers not only didn't help reduce the debt, they also on-sold the consumers' details to other businesses.) Upfront fees for debt consolidation are still common in Australia.

 
 

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Rolling your credit card debt into your mortgage... is rarely a good idea, since your house will be on the line if you can't meet the payments.

You can deal with the creditor directly. If you've fallen into debt due to extenuating circumstances such as losing your job, the Uniform Consumer Credit Code (UCCC) gives you the right to ask your creditors to revise the terms of payment through a hardship variation. 

You can also ask to revise the terms if you simply don't have the money to pay what you owe, but the terms of repayment may be more stringent. Through the hardship variation, you may be allowed to extend the duration of your debt and make smaller payments or put the debt on hold until you can start repaying it.

Creditors must consider your case and respond within 21 days. If they knock you back, the FOS or Credit Ombudsman Service can intervene on your behalf (both can be contacted on 1300 780 808). 

Under the law, creditors or collection agencies aren't allowed to mislead those in debt into thinking a new repayment plan is not available, nor are they allowed to harass a debtor in any way, including using disrespectful or abusive language. And in the case of bankruptcy, creditors of unsecured debt such as credit cards have to stop all collection activity.

There's a much higher risk for those who fall behind on secured debts such as mortgages and look for a consolidation solution. Rolling your credit card debt into your mortgage, for instance, is rarely a good idea, since your house will be on the line if you can't meet the payments. 

And refinancing or finding a new loan may mean you'll end up paying much more down the road and may be blindsided by exit and start-up fees as well as valuation and stamp duty. The UCCC also applies to mortgages, so talking to your lender should be your first step. If you refinance, be absolutely sure you'll be paying less.

DIY debt control

ASIC offers sound guidance on how to manage multiple credit card debts, regardless of whether you apply for a hardship variance. Stop using all but one of your credit cards, and only use that for emergencies. Make the minimum payments on all your cards to avoid multiple charges for late or missed payments.

At the same time, pay off as much of the principal as you can, starting with the card with the highest interest rate. 

Then, work your way through the card with the next-highest rate. When each card is cleared, cut it up and close the account or you may still be liable for fees. Then tighten the reins on your remaining card – a $2000 limit, for example.

Debt-Consolidation-number-crunch

Credit card debt in Australia

Despite the sobering effects of the GFC, Australia's borrowing binge continues. 

The RBA tally on credit card debt as of February this year was about $50bn, or around $2272 each for every Australian – one of the highest levels of consumer debt on the planet.

Paying credit card interest rates as high as 20% or more (plus fees), it's not hard to fall behind – and many consumers appear to be doing just that. 

Over the past two years there's been a big jump in financial difficulty disputes reported to the Financial Ombudsman Service (FOS). 

Its most recent annual review shows an increase of 130% between 2009-10 and 2010-11, 94% of which had to do with consumer credit.

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