When the music's over
Peter Weekes, Sydney Morning Herald, 29th of June 2005
If you're battling debt, honesty is the best policy, reports Peter Weekes.
The Reserve Bank may have sat on its hands at its last interest rate setting meeting, but that doesn't mean highly indebted families are out of the woods, particularly as many continue to give their credit cards an extreme workout.
Spending on credit cards jumped 8.3 per cent in April compared with the previous year, which given the nation's ongoing love affair with debt may not be surprising.
However, what may surprise some is that it occurred at a time when bankruptcies and personal insolvencies are rising - the first time since 2003. In the three months to March, bankruptcies jumped 2.4 per cent and personal insolvencies rose 2.9 per cent.
Carolyn Bond of the Consumer Credit Legal Service says the number may have been much higher, had it not been for financial institutions keeping households afloat by simply throwing money at them.
But what happens when the music stops and consumers are swamped with bills they simply can't pay?
Katherine Lane, a solicitor with the Consumer Credit Legal Centre (NSW), says the last thing they should do is panic.
"You should get advice and tell all your creditors you are seeing a financial counsellor, and then deal with the bills one at a time - above all, prioritise," she says.
With the help of financial counsellors, Money outlines the basic steps people should take to avoid legal action.
Own up
Speak to your bank or creditor early if you are unable to make a payment. Many will be tempted to stay silent in the hope that a computer malfunction will mean that no one notices their overdue payment, but that is as likely as pinning your financial health to winning lotto.
Lane recommends consumers keep in contact with creditors, inform them that they are in financial difficulty and arrange a realistic payment schedule.
For instance, you could suggest extending your repayment period or that the lender gives you a break from a couple of repayments in return for you producing a repayment schedule that you can and will stick to.
Bond says under the Uniform Consumer Credit Code, consumers have the legal right to apply for a variation of repayments for most consumer loans if you encounter short-term problems such as ill health and job loss.
Prioritise Your Debt
Many people are reluctant to admit that they are having financial difficulties until they start receiving phone calls demanding immediate payment.
Don't be intimidated. Bond says people are often pushed into paying the least important bill first. She says people should calmly sit down and prioritise their bills.
"When all the bills come through at once, one of the things we have noticed is that people don't prioritise as well as they should ... it makes such a difference," Lane says.
As a rule of thumb, she says, pay your essential services such as electricity, and secured loans such as the mortgage and car loan, before credit cards and other unsecured loans. She says once you have prioritised, try and give all your creditors something as they will be less likely to take further action as even a small payment shows you have recognised the problem and are trying to fix it.
"All the creditors really want is their money," she says.
Budget
Lane suggests people facing crunchtime sit down and work out how they can repay their debt within their budget.
"It's always hard juggling all the balls so get as much help as you can to get over the worst of it," she says.
Pam Pentland, the chairwoman of Australian Financial Counselling and Credit Reform Association, says counsellors can help you get a clear picture of your overall financial situation, prioritise debts, and work out how you can increase your income and reduce your expenses.
She stresses that any new agreed-repayment schedule must be strictly adhered to if consumers are to avoid future problems.
Getting help
Bond says people should consult a financial counsellor when they get into difficulties, but warns to stay clear of those seeking to profit from your misfortune.
Watchers of daytime and late-night television will no doubt be aware of companies offering to get consumers out of debt and charging them thousands of dollars for solutions that may worsen the situation.
"Commercial operators will try to steer you in one way over another, depending on how they get paid," Bond says.
She says consumers should try to see a government-funded counsellor, as he or she will give them independent advice for freeand present them with a number of options. Consumers should then discuss the pros and cons of each option.
Bond also warns people not to opt for a consolidation home loan as an easy solution to their problems before considering all the costs involved. She says paying a number of bills, rather than one large one, also gives greater flexibility to delay one payment if necessary.
Penalties
Generally, creditors are more likely to send debt collectors around to your house rather than take legal action, Bond says. Still, if action is taken consumers should immediately seek advice, she says.
Creditors can do a number of things depending on whether the debtor is in Victoria or NSW. They can apply to the court to direct part of your wage to them, or they can apply to send you into bankruptcy.
In NSW they can also ask the sheriff to seize property.
Geoff McDonald, a managing partner and insolvency expert at accountancy firm Hall Chadwick, says if a debtor is declared bankrupt, a trustee will be appointed to run their financial affairs.
The trustee will start to repay the debt once your income reaches a certain level (usually $40,000). You will also be prevented from running a business.
Property that a trustee cannot claim to repay the debt includes most household goods, superannuation, some tools of trade and a car if it is needed for work and up to a value of $6000. The usual period of bankruptcy is three years.
Alternatively, you can apply for a personal insolvency arrangement that allows you to avoid three-years of bankruptcy.
This can be done by simply signing a piece of paper, but it does need the approval of your creditor.
"It's not the debtor's choice," McDonald says. "Fundamentally you have to put a deal forward that the creditors accept. If you haven't got any money to give them as a part payment, the creditors will simply demand that you go bankrupt."
