How to deal with mounting debt

HIGH interest rates and soaring petrol and food prices have left many families struggling with debt.

Jan Pentland, chairwoman of the Australian Financial Counselling & Credit Reform Association, said debt-burdened people needed to admit a problem and take action before it was too late.

“They should make an accurate assessment of their financial situation, including living expenses and any debt commitments they have,” she said.

Counsellors said there are options for people struggling with their debts, including:

Keep paying your debts if you can

One way to quickly cut payments is the “debt-snowball strategy”. This involves paying off the smallest debt first then the next smallest and so on until all debts are repaid.

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Carolyn Bond, co-chief of the Consumer Action Law Centre, said the advantage of this was that people saw quick results.

“People often need the incentive of getting quick results — people feel better with each debt they no longer have to make,” she said.

But the snowball strategy was not always the cheapest.

“If you are someone who doesn’t need to see short-term results, you should pay the debt with the highest interest rate first,” she said.

Make a private agreement with your creditors

If you can’t keep paying, contact creditors to see if they will reduce payments, Ms Pentland said.

“Most banks have a financial hardship team that will not be the collections area,” she said.

Ms Bond said if creditors would not offer a reduced payment plan there was another option.

“If you are in hardship and the lender won’t negotiate any reduction in payment or hardship variation, you can apply to VCAT (credit division) for the tribunal to consider whether the company should agree to a hardship variation,” she said.

Consolidate and refinance your debt

This is the most common way for people to refinance their debts — usually by rolling them into their mortgage, but it has drawbacks.

“These arrangements sound very attractive because it puts all your debts in one place with one easy payment,” Ms Bond said.

“But when you consolidate all your debts, you mix together short term and long-term debts into one package which may end up costing you more than it would have to keep paying your individual debts – because by mixing them together you stretch the payment times on your short-term debt.”

The other problem is it leaves you with only one creditor to deal with.

Ms Pentland said another problem was consolidation did nothing to address the spending that got people into trouble in the first place.

“The real danger is they consolidate, but they don’t stop using the credit cards,” she said.

Apply for a Part IX debt agreement

This is an arrangement under the Bankruptcy Act where creditors accept part-payments from insolvent debtors in return for not forcing them into bankruptcy.

“They are good for people who have disposable income to pay something — especially if they have assets to protect like a house,” Ms Bond said.

“And also for people who can’t make informal arrangements with their creditors.”

But she warned people not to rush into such arrangements.

“People need to understand that applying for a debt agreement under the Bankruptcy Act will go on the public record and your credit report,” she said.

Ms Pentland said companies organising agreements charged for their services and people needed to ensure they were getting independent advice.

Declare yourself bankrupt

For people with no assets and no income, going bankrupt could be the best option, Ms Bond said.

“There are some disadvantages to bankruptcy – you are prevented from doing certain jobs and you need permission to travel overseas – but it may not be the worst option,” she said.

“There are some people who are just not able to put food on the table and struggling with debt can have serious mental health impacts.”

To find a financial counsellor, check out ASIC’s consumer affairs website.