Debt relief

If you lose your job, how will you pay your bills? CHOICE outlines your options.
 
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01 .Introduction

debt relief - cut up your credit card

In brief

  • Financial counsellors offer a free and independent service to help you assess your options if you’re having trouble managing debt.
  • CHOICE’s shadow shop found debt relief companies mainly recommend debt agreements – an expensive option that will damage your credit history.

It’s looking gloomy out there, with unemployment rates increasing and many Australians facing redundancy this year. At the same time, household debts are higher than ever: we now owe close to $160 for every $100 of after-tax income – double what we owed 10 years ago (see graph, below)

Debt relief companies are reporting extreme cases of consumers carrying up to $400,000 in credit card debt on 50 separate credit cards. Overall, about 75% of cards are not fully paid off each month and are accruing interest, many at a rate between 18% and 19%, with an average unpaid balance of $2300.

The good news, however, is that Australians are reducing their reliance on debt in preparation for the tough times ahead, with a clear trend towards saving instead of spending. Several options are available to help you get your debt back under control.

Please note: this information was current as of April 2009 but is still a useful guide to today's market.


First steps to reducing your debt

  • Make a budget Consider options to reduce your living expenses, such as selling the second car, as well as ways to increase your income, such as asking any adult children who still live with you to contribute to household expenses.
  • Research ways to cut back on expenses; talk to family and friends and for useful websites, see Debt Relief Contacts.
  • Get ahead Once you’ve freed up some cash, make extra repayments, which can slash thousands of dollars in interest off your mortgage and credit card(s).

CHOICE verdict

Despite hard economic times, there are steps you can take now to reduce your personal debt. First, take stock and then start working on reducing your debt, especially if you’re concerned about your job security.

If you’re already in trouble or your employment situation changes, it’s important to react fast – contact your lenders and see a financial counsellor. Don’t wait until you have fallen behind, as you’ll have fewer options. Never use a credit card to pay off another credit card or your mortgage; it will only get you deeper into trouble. Apply for relief if you’re suffering any hardship such as unemployment, family breakdown or sickness.

Debt agreements are no silver bullet; they’re expensive and will damage your credit history. Think carefully and exhaust all other options before taking such a drastic step.

Household debt graph

 
 

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It's important to contact your lender immediately if you’re having difficulty meeting your repayments. All lenders should assist if you are in financial hardship. The Big Four banks recently announced they would consider a repayment holiday for up to 12 months for borrowers who lose their job. Other options are to reduce payments by paying the interest only for a while or perhaps increase the term of your loan.

If you’re paying off a credit card with a high interest rate, ask your lender to switch you to a card with a lower interest rate or refinance your credit card debt into a personal loan. Then cut up the card and use a debit card instead.

Financial counselling services

It’s harder to find a solution if you’ve already fallen behind, but it’s never too late to seek help. Financial counselling services provide a free, confidential and independent service to assess your situation and help with solutions; see Debt Relief Contacts. They can assist with pleading hardship on your behalf and/or negotiating an agreement with your lender, but they advise consumers to make the initial approach if they feel comfortable doing that.

“We want to encourage people to do things themselves and learn new skills – it’s about empowerment,” says Anna Mandoki, a financial counsellor with Melbourne’s Inner South Community Health Service.

Where to get help

If you’re having trouble making ends meet or you’re in financial hardship, check out these services.

Relief for energy bills

If you’re having difficulty paying your bill, contact your retailer, who can usually offer flexible repayments. You may also be eligible for government assistance. For more information and contacts, visit www.choiceswitch.com.au contact your local fair trading/consumer affairs office.

Tax bills

You can apply to the Australian Taxation Office to delay payment of your tax debt or even relief from part or all of your tax debt if you are in serious hardship; see www.ato.gov.au or call 13 11 42.

StepUP Loan

The Good Shepherd Youth and Family Service, together with National Australia Bank, have developed a low-interest personal loan product called StepUP Loan, which is available if you have a health care card or receive Family Tax Benefit Part A. Loans are usually between $800 and $3000 and used to purchase household furniture, computers and second-hand motor vehicles. The interest rate is 3.99%, fixed for the term of the loan, repayments are flexible and there are no fees or charges. See www.goodshepvic.org.au/microfinance.

No-interest loan scheme

There are 280 community-based organisations across Australia offering interest-free loans (not to be confused with store finance) to people on a health care or pension card who are genuinely low-income earners. Each community group has its own criteria, but loans are typically between $800 and $1200 for essential household goods and medical equipment and are repaid over 12 to 18 months. See www.goodshepvic.org.au/microfinance.

Early release of super

In very specific circumstances, such as when you’re about to lose your house, you can get access to some or all of your superannuation money – see www.apra.gov.au. Releasing your super only makes sense if you’re in short-term difficulty; one trap of doing this is potentially losing your house and your superannuation for good.

Case study: Living expenses exceed income

Mary and Henry (not their real names) found themselves in a situation that typifies the debt cycle. In their 30s and with two children, Henry lost part of his income when his employer cut back on costs, while at the same time Mary’s business failed. They owed $42,000 on credit cards and personal loans to seven different lenders.

Melbourne-based financial counsellor, Anna Mandoki, helped the couple prepare a realistic budget which revealed that their living expenses, even before debt repayments, exceeded their income, showing the family had been living beyond their means and was propped up by credit cards.

The first step was to align their expenses with their income. Anna then helped the couple address their debts; Mary opted for bankruptcy, while Henry was able to negotiate hardship arrangements on his debts. This meant Henry’s credit history was unaffected, so now they’re able to continue working towards their goal of purchasing their own home.

Debt agreement

This is a binding agreement between you and your creditors where the creditors agree to accept a sum of money you can afford to pay. In order to qualify:

  • You need to be insolvent, which means you’re unable to pay your debts at their due date.
  • Your after tax-income can’t exceed $70,898.10.
  • You can’t owe more than $94,530.80 in unsecured debts and you own only up to the same amount in assets.
  • The limits are updated each year on March 20 and September 20, the limits above are current for October 2011 – more information and up-to-date limits can be found on the website of Insolvency and Trustee Services Australia (ITSA).

Under a debt agreement, your debts are frozen, no more interest applies and you repay a set amount per week over three to five years.

DAs are usually negotiated and administered by debt agreement administrators, who broker a deal with your lenders on your behalf. Anna Mandoki, a financial counsellor with Melbourne’s Inner South Community Health Service warns, however, that “financial counsellors regularly see people who have defaulted on their debt agreement because it was based on an unrealistic budget and was unaffordable in the first place”. While debt agreement administrators are required to help you prepare a realistic budget it is crucial you go through it in every detail to make sure it adequately reflects all your outgoings.

A debt agreement needs to be lodged with the government regulator, ITSA, and a majority of your unsecured creditors need to agree to it to make it binding. You usually pay back 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 you pay to the debt agreement administrator (see From a Debt Administrator’s Case File, below). There is also a government charge of 3.5% .

As DAs apply 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 your repayment for the DA, your creditors can obtain an order to force you into bankruptcy.

Bankruptcy

The main advantage of bankruptcy over a debt agreement is relief from all payments – but this comes at a high cost. You’re usually bankrupt for three years, during which time you’re allowed only very limited assets – the rest are sold by your trustee to repay creditors. Anything you acquire during this period, such as an inheritance, will also be lost. You’ll repay 50% of your after-tax income above a threshold, currently about $41,250 (more if you have dependants). You won’t be able to hold jobs that involve handling money or require a licence, and you need agreement from your trustee to travel overseas. For more information, go to www.itsa.gov.au.

Case study: From a debt administrator’s case file

Each month, debt administrator Fox Symes receives about 5000 calls from people in debt, about 300 of whom get a debt agreement. One of them is Tara (not her real name), a beauty therapist with a husband and two children.

Tara has three credit cards with a total debt of about $70,000. She also has one car loan (on a BMW) and another joint car loan with her spouse, on a Renault. These loans are secured and not covered by the debt agreement (see Debt Agreements, above). Tara will pay about $49,000 in total, which includes roughly $36,500 to her creditors, a $1650 government charge and $10,580 set-up and administration fees to Fox Symes.

The agreement goes over three years and states she’ll pay back $265 per week in the first year, then increase the payments to $320 per week once one of the car loans will be finalised.

The weekly payments need to be covered by the money left over after Tara and her spouse pay for their weekly expenses, which include $320 for rent, $235 for food and money for car loan repayments. They could have trouble finding money for extras such as school excursions or takeaway meals.

The couple will have to budget in order to keep to the agreement, if Tara defaults on the repayments she could be forced into bankruptcy.

Debt relief companies (also called debt agreement administrators) help you enter into debt agreements then act as administrator of the agreement. They also usually offer bankruptcy and other debt relief services and they charge fees. To see what they offer, CHOICE engaged two shadow shoppers who each phoned the same 11 companies. The largest, Fox Symes, was called twice by each shadow shopper.

Both shoppers claimed identical profiles, with only their debt level differing. They stated an annual before-tax income of $40,000. Both were single with no dependants, lived in a two-bedroom apartment in Sydney’s outer suburbs and had missed their last three loan repayments. Apart from their cars, some superannuation and normal household goods, they had no savings or substantial assets.

  • “Michelle” owed $12,000 on two credit cards. She recently had a car accident and used her credit cards to pay $3000 in repairs for which she hadn’t budgeted. She owned a car worth about $6000.
  • “Elaine” owed $40,000. She had four credit cards with a combined debt of $28,000 and a secured car loan of $12,000. She was unemployed for three months but has since found employment. Her car was worth $8000.

What CHOICE uncovered

For both shadow shoppers, the majority of companies recommended a debt agreement. Most also offered other options to consider, such as calling the lender, applying for a hardship variation, refinancing or bankruptcy. Regrettably, none advised the shadow shoppers to seek help from a financial counsellor. Most of the conversations were quite short, averaging 10 minutes for Michelle and 20 minutes for Elaine.

Typically, a consultant asked the shadow shoppers for their debt, income and other details about their situation and then outlined the options. In one case, a debt agreement company asked Elaine to completely submit her financial affairs; she was told once an agreement was made her pay would go into the company’s trust account and it would send her money to live on and pay her bills, debt repayments and fees.

If the company sent her less money than she needed to live on, this would have been a very dangerous option. Some companies quoted a set-up fee only and didn’t provide information on ongoing fees, saying that these were included in the repayment amount. Quotes ranged from up to $2000 for Michelle’s $12,000 debt, and $6000 for Elaine’s $28,000 debt (her car loan was not included in the agreement).

What would a financial counsellor say?

CHOICE asked Richard Brading, Principal Solicitor of Wesley Community Legal Service in Sydney, to outline options for our shadow shoppers.

For Michelle, a debt agreement is not an attractive option due to the high costs. As there are only two creditors (for her credit cards), she could try negotiating a reduction in repayments for a short period and possibly a reduction in the interest rate. Alternatively, she could consolidate the two credit cards into a personal loan at a lower rate. With any repayment plan she would need to set aside some money for any future unexpected expenses. She could sell her car and use the proceeds to pay back part of the debt. She could also consider renting out the second bedroom in her apartment or taking a second job.

For Elaine, the burden of paying off a debt agreement over five years would be very heavy and any unexpected setback, such as a temporary period of unemployment, would cause the arrangement to fail. The alternative is bankruptcy, which would give her a fresh start. On her current income she wouldn’t have to make any contributions to the debt. While her lender could repossess her car, they’d usually allow her to keep it so long as she kept up with the loan repayments.

To avoid bankruptcy, Elaine could apply for a hardship variation because she was unemployed for three months. She could also argue “maladministration”, which means she has been lent more money than she can reasonably afford to repay. If her lenders didn’t grant her hardship application and refused to reduce the debt because of maladministration she could complain to the ombudsman.

Your rights under the consumer code

Many people spiral into debt through circumstances beyond their control, such as losing their job, family breakdown or illness, without realising they may have been able to renegotiate their debts. The key is to act immediately; 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, which states: ”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.” It’s important to let your lender know about your situation. Bankruptcy trustee Andrew Aravanis has seen many people, who underwent hardship some years earlier, try to maintain their situation by applying for more and more credit cards, which they use to service their mortgage and other debts. After exhausting all their borrowing opportunities their only option now is bankruptcy.

You need to give the lender information about your financial situation and apply for temporary relief, such as reducing your minimum repayments and/or waiving fees or even interest. Offer what you can afford and make sure you can still cover your living costs and any other debts. It’s up to your lender to assess your application, but all should have their procedures in place.

Raj Venga, Credit Ombudsman, has also seen some showing compassion: “One lender reduced the interest rate by 3% for six months.” If your lender refuses the application, complain to the Credit or Financial Ombudsman Service – both services are free for consumers. You can also have your case considered by the relevant state tribunal or court.

Debt relief contacts

Financial counsellors

ACT

NSW

NT

  • Anglicare, 08 8948 2700 (Alice Springs) or 08 8985 0000 (Darwin)

Queensland

SA

Tasmania

  • Anglicare, 03 6234 3510 or 1800 243 232

Victoria

WA

Useful websites

Thank you

For their help with this article we’d like to thank:

  • Richard Brading, Principal Solicitor of Wesley Community Legal Service in Sydney
  • Philip Field, Ombudsman – Banking & Finance at the Financial Ombudsman Service
  • Anna Mandoki, Financial Counsellor with Melbourne’s Inner South Community Health Service
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