Struggling to pay your bills or make your loan or credit card repayments is a scary position to be in, especially if you have a family relying on you.
Whether it’s the result of poor money management or you’ve been affected by unemployment, ill health or a relationship breakdown, the feeling of hopelessness as debts roll into yet more dollars can be overwhelming.
The worst thing you can do in this situation is ignore it and hope it will go away – this will only make things worse. Instead, you need to take action now. Here are your options.
The most sensible first step if you’re struggling to keep up with repayments on your credit cards or loans (including your home loan) is to let your creditors know.
Not only will they appreciate your honesty, they may also cut you some slack by holding off on calling in the debt collectors and negotiating with you on payment terms.
If you can’t come to an agreement ask for a review. Still not happy? Make a complaint to the Australian Financial Complaints Authority (AFCA).
Under Australian consumer credit law, providers of personal and household finance, including mortgages, car loans, personal loans and credit cards, are required to consider hardship variations (flexible payment arrangements) if you’re experiencing financial difficulty. The same applies to debt collectors attempting recovery action.
The main types of variations available include:
To qualify, you must be experiencing verifiable financial hardship due to a sudden drop in income or a dramatic increase in expenses.
While ignoring your debt is generally a bad idea, there are situations where you might legitimately choose not to pay. If you’re disputing the debt or believe there are inaccuracies, it’s reasonable to pause payments while the matter is being resolved. Engaging with the creditor and keeping a record of all communications is key here.
In Australia, a creditor can only legally pursue you for a debt if, within the previous six years, you have:
Acknowledged the debt in writing (or verbally if recorded) as yours, or
After six years, the debt becomes ‘statute-barred’, meaning no legal action can be taken to enforce it. However, be careful when communicating with the creditor—even if you acknowledge that a debt exists, avoid confirming that it is your debt or that you are liable for it. Confirming your liability in writing or making a payment could reset the statute of limitations, allowing the creditor to pursue legal action again.
If you only have a handful of creditors, and can access funds now or over time to pay a portion of your debts, proposing an informal arrangement may be your ideal solution.
If successful, informal arrangements help you avoid a debt agreement or bankruptcy. You therefore avoid the restrictions of these allowing you to retain any company directorships you hold, as well as protect important assets like the family home. It also means that the process is not recorded on the National Personal Insolvency Index or your credit record. Your circumstances are confidential and there is no public record of your arrangements.
Informal arrangements require each of your creditors to separately accept your proposal. They are therefore more attractive where you can offer an up-front payment to your creditors, and if required, further payments over time to improve the return.
It’s important to note the ATO does not accept less than full payment of its debt unless a formal insolvency appointment is entered into. Accordingly, if you have an ATO debt you can’t pay in full, your available options will include a Part IX (9) Debt Agreement, Part X (10) Personal Insolvency Agreement or Bankruptcy.
A Part IX (9) Debt Agreement is a formal, legally binding agreement between you and your creditors. Essentially, it involves you negotiating to pay a percentage of your combined debt that you can afford over time.
Repayments are made through a debt agreement administrator. Once all are fulfilled, the agreement ends and your creditors can’t recover the rest of the money you owe them.
The benefit to you is that you end up paying less, get out of debt and avoid bankruptcy and its repercussions. The benefit to your creditors is that they may receive more money than if you had become bankrupt.
Importantly, you’re only eligible to enter one if your net debt or assets, as well as after-tax income, fall below specific thresholds.
A Part X(10) Personal Insolvency Agreement is similar to a debt agreement, but for those who do not meet the above asset, debt or income thresholds. It has a similar effect to debt agreement, though the costs are significantly higher and you’re prevented from being a company director while subject to a personal insolvency agreement.
While bankruptcy isn’t viewed as a positive course of action, it can sometimes be the best thing to do if your debts have spiralled beyond your control.
Under voluntary bankruptcy, you are legally released from almost all of your unsecured (credit cards, personal loans) and secured (mortgage) debts. The exceptions include penalties and fines, child support payments, and university loan debts under HECS/HELP.
For some this can mean a fresh start. For others, it can make it hard to get credit, limit their employment options or cause them to lose their home. Because of this you need to think carefully before pursuing it.
However bad your financial situation is, knowing you have options, as well as what your options are, can be a welcome light at the end of a stressful debt tunnel. Ultimately, it’s only money. So don’t let it keep you up at night, just think of it as a hurdle you can overcome.
Unsure how you should deal with your out-of-control debts? Contact us today.
For more information on personal insolvency, check out our personal insolvency page here.