If you’re struggling to meet minimum repayments or you have out of control debts because of the interest, you have several options available for debt relief.
Most financiers will not be able to lend to you as you will not meet their credit requirements – so you must seek help from other avenues. Besides, you probably don’t want to borrow any more if your debts are already out of control.
The time to act is before the situation gets beyond repair and your stress levels become unmanageable.
Many Australians find themselves in the same position as you, with 30,000 each year entering into some type of formal insolvency engagement and countless others working with creditors to pay them off.
The five options we discuss here for tackling out of control debt are:
- Financial hardship assistance
- Don’t pay and see what happens
- Debt agreement
- Informal settlements
Take a read and consider the most suitable option for your present situation…
1. Financial hardship assistance
Your bank or credit provider is legally required to offer credit hardship assistance.
Such assistance may include a temporary stop or reduction in your payments, or some other variation. Recovery action will generally cease and your lender will not usually notify a default to credit reporting agencies.
2. Don’t pay and see what happens
Ideally, we do not recommend avoiding your debts. However, disputes or other reasons for non-payment may arise so it’s important to understand what happens if you don’t pay a debt.
You can only legally be pursued for a debt if you have, within the previous six years:
- Incurred the debt;
- Confirmed in writing that you are liable for the debt/will pay it; or
- Made payments towards the debt
After this time, it becomes ‘statute barred’ and no legal action can be pursued against you by debt collectors.
3. Consider a debt agreement
A debt agreement is a formal arrangement with your creditors to pay a sum of money towards your debts over time.
You propose the amount of contributions to be made, the time period for payment, and whether assets are to be included. Your creditors then vote to accept or reject your proposal. If accepted, essentially all of your creditors are bound by it.
Importantly, debt agreements are only available to people with net debts or assets of less than $111,675 and after-tax income no greater than $83,756. For those outside this threshold, a Personal Insolvency Agreement is similar; or other options may be available.
Debt agreements are best suited to people who have a property to protect or have real reasons to avoid bankruptcy. We further discuss the pros and cons of a debt agreement here.
4. Negotiate with your creditors
To many Australians, it may sound unbelievable that your creditors would accept less than full payment without a formal insolvency appointment.
However, if you’re considering a debt agreement or bankruptcy, it may be worth speaking to your creditors to see whether you can settle their debt and avoid these alternatives.
The key to negotiating such proposals is helping creditors understand your position and the likely outcomes for them under the options available to you. Engaging expert advisors can make the process easier and increase the likelihood of success.
You can read further about these informal arrangements and examples of people in this situation who we’ve helped.
Most concerns people have about bankruptcy relate to its stigma and about obtaining future credit. However, bankruptcy may be the best option when you have out of control debts.
While we generally recommend other options if they’re realistically achievable, it’s good to know your worst case scenario, so you can compare options.
Some key points about bankruptcy are:
- You get immediate relief from your debts;
- You can generally keep your assets, unless you have a house or car of significant value (even then a family member could buy your house or car from your bankruptcy trustees);
- Compared to a debt agreement, it’s generally shorter and often cheaper;
- Under newly proposed laws, the bankruptcy period may be reduced from three years to one year.
Further information about bankruptcy is available here.
If you don’t think you’re quite at this serious stage of debt yet, our article on managing your debt may be of more suitable to you.