Drowning in debt? Find a solution that’s beneficial for you and your credit history.
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Many Australians struggle with debt. In fact, Australian household debt is consistently rising, along with personal insolvency declarations. If your debt levels are creeping up and you're struggling to cope, there are a variety of debt solutions, including debt consolidation, balance transfer credit cards and debt agreements, that you can consider to help you regain control.
This guide explains what they are and how to find the right one for you.
What's in this guide?
- How do debt solutions work?
- What debt solutions/agreements are available?
- How many Australians struggle with debt?
- How are debt solutions different from bank debt consolidation loans?
- How does a debt solution service affect my credit score?
- Why would I use a debt consolidation company?
- How do I compare debt solution companies?
- What are the risks of getting a debt solution?
How do debt solutions work?
A debt solution is usually offered by a specialist debt company. Some companies offer debt consolidation services, where they offer to repackage all of your debts into one loan.
Debt solution companies work with people who have a large amount of debt to help them reclaim their lives and repay the money they owe. They offer to negotiate with creditors on your behalf, coordinate repayment plans and can help you file for bankruptcy if your financial situation necessitates it.
Many debt solution companies offer budgeting assistance or customised debt solutions in order to help you get out of debt faster. This option will help empower you when it comes to restructuring your finances.
There are also various debt agreements, both formal and informal, that are available for people who are unable to pay off their debts. With these agreements, you can potentially consolidate your debts into one loan, reorganise your repayment schedule or even have some or all of your debt written off.
What debt solutions/agreements are available?
There are a number of different debt solutions and agreements that you can opt for when you are unable to pay your debt for any reason. Bear in mind that the best one for your situation will depend on the type of debt you have, the amount of debt in question and your reasons for being unable to pay. Solutions and agreements include the following:
Balance transfer credit cards
A balance transfer credit card offers you a low or 0% interest rate for an introductory period when you move your existing debt to the new credit card account. This introductory period gives you breathing room from interest charges and can allow you to pay off your debts faster for less money.
Informal debt agreement
An informal debt agreement is an agreement between you and your creditors whereby you arrange a reduced repayment schedule that better suits your situation. There is no legal requirement for creditors to agree to an informal debt agreement; however, many lenders have financial hardship measures in place in the instance that your circumstances change dramatically in a short period of time (e.g. sudden job loss). This type of debt agreement does not affect your credit score.
Part IX debt agreement
A Part IX debt agreement is a legally binding agreement between you and your creditors outlining a new repayment schedule to suit your circumstances. It is a flexible alternative to bankruptcy. Most people struggling with various debts can qualify for a Part IX debt agreement. This type of debt agreement stays on your credit file for five years.
Part X personal insolvency agreement
A Part X personal insolvency agreement is designed for people with a more complicated debt situation. It often allows you to consolidate your debts into one lump-sum loan without declaring bankruptcy, but this option is only available to those with over $90,000 in unsecured debt. Because there is no eligibility requirements for a Part X, it is generally considered to be suitable for higher income earners than a Part IX. This type of debt agreement stays on your credit file for five years.
Asset protection is the act of protecting your assets from creditors who are taking legal action against you. You can hire a professional third-party to advise you on how to protect your assets if, for example, you are being sued.
Bankruptcy is a legal state whereby you are absolved from your debts. Filing for bankruptcy is generally considered to be a final resort. You can apply for bankruptcy in two ways: through a debtor's petition (applying for bankruptcy yourself), or by a sequestration order (forced into bankruptcy through the courts). You can only be declared bankrupt by a sequestration order if you owe over $10,000 in debt (increased from previous permanent threshold of $5,000 as of 1 January 2021).
Bankruptcy is often described as a "financial clean slate", but it is not a decision to be taken lightly as the regulations around it are complex. However, all of your unsecured debt will be wiped clean with this option. Bankruptcy remains on your credit file for five years.
If you do not think that you are liable to pay some or all of your debt, you can employ the services of a third-party professional to investigate your creditors.
Creditor negotiation is where you employ the services of a third-party professional to negotiate with your creditor on your behalf and potentially get some or all of your debt written off, so you have less to pay.
National debt helpline
If you want to speak to a professional on the phone about your money problems, you can call the National Debt Helpline for free financial counselling on 1800 007 007.
External dispute resolution
If you have a valid dispute with your creditor regarding your debt that you have already tried to raise internally that has not been resolved, you can raise a complaint with the Australian Financial Complaints Authority (AFCA). Your provider will then be given up to 30 days to reach a resolution with you. If a resolution is not come to, the financial firm will provide an EDR (external dispute resolution) response to AFCA.
How many Australians struggle with debt?
Debt is prevalent throughout Australia. Australian household debt has steadily risen over the past three decades as more of us aim to own homes and continue to rely on products such as car loans, personal loans and credit cards. In fact, the ratio of household spend to income more than doubled between 1995 and 2015, going from 104% to 212%, according to the OECD Data released in 2015. This means if the average person earns $80,000 net, they are spending $169,600 per year.
Sources: Reserve Bank of Australia, Finder Consumer Sentiment Tracker May 2020
How are debt solutions different from bank debt consolidation loans?
Debt solutions and bank debt consolidation loans might sound similar but they have one major difference. Debt solutions are designed for large amounts of unsecured debt across a variety of platforms. They should only be taken out as a last resort when unsecured personal loans aren’t an option for you.
With a debt consolidation loan from the bank, you don’t get your interest rate or your repayments frozen and it may be up to you to close your previous credit accounts after consolidating. You will also need to have good credit and look like a good prospective borrower to the bank, which is atypical for most clients carrying multiple debts.
How does a debt solution service affect my credit score?
Typically, debt solutions have a negative impact on your credit score. However, this will largely depend on the following:
- The type of debt solution that you opt for
- The current condition of your credit
- The reporting practices of your creditors
- The size of your debts
- Whether your other debts are in good standing
- How much less than the original balance the debt is settled for
There are a number of other variables that may also affect your score.
Why would I use a debt consolidation company?
Consider the services of a debt consolidation company for any of these reasons:
- Your debt feels too large to tackle on your own. If you have thousands of dollars of debt, it can feel like a monster is looming over you and you may not have the confidence to deal with it yourself. That’s where a debt consolidation company can work for you.
- Eligibility. If you aren’t eligible for a bank’s debt consolidation loan, it’s time to consider a debt consolidation company or non-bank lender.
- You struggle with budgeting. You may have a fluctuating income (e.g. if you are self-employed) or outgoings that are tricky to predict effectively which can make budgeting difficult. However, budgeting is often one of the first steps proposed by a debt consolidation company, and many of the companies offer personalised and tailored budgeting options to make this task easier for their clients.
- Flexibility. Seeking out a reputable company that can tailor its solutions to help you get the best out of your current financial situation can mean flexibility that is unavailable from a standard personal loan.
How do I compare debt solution companies?
Comparing debt solution companies can be a bit confusing at times. However, there are some easy ways to find the one that meets your needs:
- What are the fees? If the company is open about the fees it will charge you or if it at least has lower rates than those offered by a competitor, then it’s worth considering. However, just because one company has cheaper fees does not mean that it offers the best solution.
- Can they minimise the interest you’re paying? If the company can’t reduce your interest, look elsewhere for your debt solution. Having a lower interest rate might not seem like much, but for the term of your debt solution, it can end up saving you big money.
- Can they help you budget? Many debt consolidation companies offer a personalised and tailored budget for you and your financial situation. However, it helps to think about the other factors listed here before making a decision on your debt solution company.
- Can they talk to creditors for you? At this stage, you’re avoiding your phone because you have a pretty good idea of who is calling. Some debt solution companies offer to talk to your creditors on your behalf, which can ease a lot of anxiety.
What are the risks of getting a debt solution?
There are some risks that are associated with getting a debt solution:
- Bad habits die hard. You may have paid off your short-term debts but haven't changed your long-term behaviour. This might lead you down a familiar path because debt consolidation does not change your spending habits.
- Your credit can take a hit. Depending on the debt relief option you choose, the solution can negatively impact your credit history. For example, Part 9 Debt Agreements are a form of bankruptcy and are listed as such on your credit file.
- You may not be saving as much as you think. You should be mindful of the total cost of the debt consolidation solution you are considering. Ask about every fee you might be charged so that you get a good understanding of what it may end up costing.
There are a variety of ways for you to get out of debt. However, it’s always a good idea to examine your financial habits first before deciding to see a debt solutions agency.
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