Since the Global Financial Crisis, borrowing has
become harder. Lenders now apply much tighter lending rules. For example, lenders are not allowed to lend money
or grant credit unless they are certain it can be repaid without causing the
borrower hardship. Consequently, lenders will only consider lending to people who
meet strict lending criteria including:
- Having a good credit
rating
- Demonstrating a secure
income; and
- Can comfortably afford
the level of repayment required.
You may also have to provide collateral. This means staking an asset of comparable value to the loan being sought. For example
you may need to mortgage your real estate or car to secure the loan.
Start by asking your current bank, mortgageee or financier about their detb consolidation products. Don't despair if you don't think you can meet the lending criteria for a debt consolidation loan. There are alternatives. It just means that the solution to your
problem will have to come from within your own resources rather than theirs.
Private borrowing
from family or friends could be considered but be careful. The consequence of not being able to
repay a relative or good friend can be disastrous and emotional.
Another source of
funds can come from the early release of superannuation. Although this is difficult to obtain
because of the importance of superannuation savings, in cases of extreme
hardship, it can be considered.
What follows is an
exploration of other options available for solving debt problems. There are two parts. The first deals with solutions for reducing
repayments. The second deals with
what to do when you simply can’t persuade your creditors to let you pay at an
affordable rate, or you just can’t pay at all.
If you feel pressured, it is likely that you are paying your debts then
finding you are short of funds for your essential spending on food, accommodation, and other family needs. This is no way to live.
To turn things around, put your well being and that of your family ahead of
creditor demands. Choose to keep enough of your earnings to cover your essential living expenses between pay days. Debt payments come a distant second. This also happens to be the
legal position too, although you will not find any creditor or debt collector
telling you so. Make this first change in your approach and overnight,
the pressure you are under to provide for your family, will ease.
What about your creditors you ask. Well, you have Rights and those Rights
create options for dealing with your debts on your terms. Our service is to introduce you to your Rights and teach you how to use them to
overcome your debt problems in a dignified way.
If you don’t qualify for a debt consolidation loan, the next thing to consider is whether you need to do something at all. If you have few assets of value and you are not working then creditors will find it hard to force you to pay because you don’t have any spare money. Sure, they can annoy you with calls and letters but when you have nothing to give them then their debt recovery process becomes ineffective. Be truthful and tell creditors that you are out of work but looking to return to work and that you will pay them when you are able. If you aren’t returning to work, tell them that.
In another example, if you know that you will shortly receive enough money to pay your debts perhaps from an inheritance or the sale of property, sit tight and put up with the calls of demand. You have exactly as long as it takes the creditors to bankrupt you to receive the money and pay them out.
IMPORTANT. A creditor, who can repossess the asset, might defer payments for a short time if you ask them early. However, after three months they will probably move to repossess the asset.
PART
1 - Strategies to make debt payments
affordable
When calculating how much you can afford to pay off on your debts, allow for your reasonable living expenses e.g. accommodation, food, utilities, transport, health, education etc. Whatever is left over is all that you can spare to pay creditors.
Most creditors will
work with you to enable you to recover from temporary financial setback. Indeed, they are obliged to do so under
various consumer laws. When there is only
one creditor to consider, payment terms are easily negotiated. But if there is more than one creditor,
their competing demands have to be managed.
There are many options for reducing debt repayments without borrowing more money. What they all have in common though, is that you need to make mimimum repayments that are commercial and realistic. A commercial and realistic repayment means one that:
- You can afford without causing yourself hardship;
- Repays more than could be recovered through legal action;
- Will repay the full debt over 48 months or less;
- Will be paid in regular monthly installments.
Can you make payments that are commercial and realistic? Click the links to read about your options.
If you know you will have trouble
paying your account by the due date and this is a temporary condition, then
contacting your creditor and asking them to extend the due date for payment is
advisable.
As a minimum you
will be expected to offer an explanation as to why payment cannot be made on
time even to the extent of summarising your financial situation to demonstrate
the point. You will also be
expected to commit to payment within a short period, usually three months or if
the debt is a recurring account, before the next bill falls due.
Creditors usually
have a telephone service to call to arrange for an extension of time for
payment. For your protection, you
should ask for a letter confirming any verbal arrangement reached. In any event, you should write to the
creditor and confirm your understanding of the arrangement being careful to
mention the time and date of the conversation in which it was agreed.
Debt reduction plan and deferment of recovery
action
When your debts are
already overdue, particularly if you want to consolidate the payment of a
number of accounts under one plan, you can ask creditors to defer debt recovery
action while you make payments. If
recovery action has begun, you can ask that further action be deferred while
you make payments.
You need to prepare
and submit a detailed debt reduction plan for the consideration of your
creditors. The plan should be in
writing, independently verified and must set-out:
- Causes – they like to know
if you have been reckless or it just bad luck;
- Viability of the plan – they
prefer an independent view of the prospect of success which often requires the
preparation and presentation of a forward budget to demonstrate the working of
the plan;
- Insolvency comparison – they want
to know if they can get more money by bankrupting you instead with particular
emphasis on the recovery of assets that may have been disposed of in recent
years.
Creditors may grant
up to three months ‘holiday’ on debt payments in response to requests for
temporary assistance. Any longer than this and they are required to go to the
trouble of recording the deferment of payment in writing. At the end of the
three month period, payments are expected to be brought up to date.
If meeting your
payment is causing you hardship, you can ask creditors to vary the terms of
your credit contracts by either:
- Extending the term of
the contract to reduce the level of repayment;
- Granting a moratorium
on payment for a period of time; or
- A combination of
both.
There are three
conditions however. The first is that your financial difficulties are the
result of unemployment, illness or similar good reason. The second is
that making the change will enable you to satisfy your obligation to the
creditor in full. The third is that interest must continue to be charged.
It is necessary
to make a detailed submission to your creditor stating your case. If the
creditor rejects your request you can have the decision reviewed by a
Court.
A Debt Agreement is an insolvency
process under the Bankruptcy Act. The purpose of a Debt Agreement is to enable you and your
creditors to reach a compromise about how to repay your debts. Debt Agreements are subject to strict qualifying criteria. These
are revised every three months by the Federal Government so check with us for your eligibility.
The process starts with giving a summary of your
financial position and registering your Debt Agreement proposal with the Government. Your proposal is circulated to your
creditors who vote whether to accept or reject your offer. If the majority of creditors
accept, your Debt Agreement is
activated and you begin to make payments. If the Debt Agreement is rejected or you later default on payment, you
can be made bankrupt.
While a Debt Agreement
is in operation, effected debts are frozen. No further interest will accrue and
creditors can’t take further recovery action. Secured creditors are not
restrained. Debt Agreements are
recorded against your credit rating as ‘Bankruptcy’.
Unlike bankruptcy
though, a Debt Agreement does not protect the first $50,000 of your annual earnings, nor can it be
annulled. A Debt Agreement
requires you to repay more money than you would pay if you were bankrupt. Often users want to escape their Debt Agreement when it
proves unaffordable. This can be done quickly although Debt Agreement administrators try to oppose such action because it will terminate their fees.
Debt Agreements are designed to be easily self managed. Alternatively, you can appoint a Debt Agreement
Administrator to receive your payments and distribute them to your
creditors but you will pay substantial additional fees for this service.
A Personal Insolvency Agreement is a
variant of the Debt Agreement used in cases with higher levels of personal
debt, assets or income. Personal
Insolvency Agreements differ from Debt Agreements in that they require a third party, called a
Controlling Trustee to manage them.
Because the
cost of recovering a debt can quickly eat away its value, many creditors are
open to reasonable offers to settle an account. A Commercial Settlement is
simply an agreement between you and a creditor to settle on an amount to be
paid in full and final discharge of your debt.
There is no rule of
thumb as to how much a successful offer should be but it needs to be your best
offer. Each creditor has to be separately negotiated. Other tips for
success include:
- You should offer a
lump sum payment;
- Payment must be made
promptly, usually within 48 hrs;
- Payment should not be
made until you receive written acce
Your offer
does not have to be a cash offer either. For example, you could offer
property, services or some other thing of value in settlement of your debt. If
the creditor is agreeable to it, that’s what counts.
PART
2 – When you can’t pay
Most unsecured
creditors, particularly government creditors will consider releasing you from
some or all of your debt on compassionates grounds or when payment of the debt
will inflict severe hardship upon you. For example, a person with a terminal
illness may be granted compassionate debt relief if at the same time they are
simply unable to pay from assets or income.
The grounds for
relief are not specified generally although the Income Tax Administration Act
provides some guidance in the case of taxation debts. Suffice to say that
the hardship experienced must be shown to be unacceptable by a community
standard.
Bankruptcy rids you
of ordinary, unsecured debts including credit cards, personal loans, and any
shortfall on sale of a secured asset such as a car or house.
At the same time
bankruptcy protects your essential assets and earnings against the
unreasonable or excessive behaviour from creditors. For example, bankruptcy protects assets such as a
modest car, normal household furnishings, tools of trade and superannuation
contributions.
Bankruptcy also ensures
that you can keep the first $50,000 annual income in order to maintain a
standard-of-living acceptable by community standards.
Bankruptcy runs for three years
but it is reported on your credit history for seven. During the three
years of bankruptcy, there are some restrictions
that apply. These effect your
ability to run a company, write large cheques, and work as a lawyer,
accountant, stock broker, real estate agent or similar occupations requiring a
public license.
Contrary to popular
belief, when bankrupt you can run a business as a sole trader providing
you trade under your own
name. You can also travel overseas
for business, pleasure or compassionate reasons with the support of your
bankruptcy trustee.
Bankruptcy should not be
entered into lightly. When no
other options are suitable though, it is a good way to start over and bring
your worries and debt problems to an end. (Read 'Better off bankrupt')
When
bankrupt you may make an offer of settlement to your creditors. If the offer is
accepted, your bankruptcy may be annulled. That is, things can be put back to
the way they were before bankruptcy, to the extent that is possible. Annulment
of bankruptcy brings an end to the restrictions of bankruptcy and is generally
regarded favourably by lenders and financiers when considering future
applications.
The
offer you make must result in a better return to creditors than they would
otherwise expect to receive if the bankruptcy ran its course. The annulment is
effective upon acceptance of your offer and is not dependant on completing the
terms of the agreement.
Because a Section 73
settlement can only take place from bankruptcy, creditors already know how
little they can expect to receive. This is in contrast to the position when
proposing a Debt Agreement when creditors hold suspicions and hopes about the
funds available. Additionally,
creditors will have accessed insurances or bad debt tax write-off benefits and
so any additional funds being offered will be ‘cream’. Additionally, the final
Trustee costs can be included in the sum being offered without disadvantage to
creditors. For these reasons the post-bankruptcy settlement is a superior
option to a Debt Agreement to achieve the same result.
This website is a
general guide to your options. Reading it alone will not improve your situation, you must take
action. As everyone’s situation is
different we recommend you undertake a personal consultation to determine which
option is best for your individual circumstances.
For further assistance (CLICK HERE) or call 1300 305 510, Australia-wide.
