Debt relief

If you lose your job, how will you pay your bills? CHOICE outlines your options.
 
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04.Shadow shop

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.

 

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