Tips for dealing with out-of-control personal debt!
Australian household debt has risen steadily over recent decades and as a result we are now second highest in the world when it comes to our household debt levels! The figures currently sit at around $168,000 in debt being owed by each and every Australian household! And even more concerningly, reports show that 37% of us are struggling to pay off those debts!
If your debt level feels out of control, and you’re overwhelmed by interest repayments and can’t see light at the end of the tunnel, here are our top tips for trying to get things back on track.
1. Make a list of what you owe
Whilst it may be the last thing you feel like doing, getting to grips with exactly what you owe is the first vital step to regaining control. So, if you haven’t already, sit down with all of those statements and bills and prepare a list.
As well as listing the amount you owe, look at the interest rates, repayment amounts and due dates, and penalty provisions. This step will help you to prioritise the debts, create a budget and set some goals in terms of what is achievable to reduce the debt load.
If you haven’t already done so, this step may also help you realise – maybe it’s time to cut up that extra store credit card, cancel that subscription, or close that account, any of which may be accumulating debts and secretly working against you achieving your goals.
2. Create a Budget
Once you’ve got your head around what you owe, try to draw up a realistic budget. A budget should set out your ordinary monthly household income and deduct your monthly living expenses, such as your rent or mortgage, taxes, utilities, insurance, school fees, groceries and fuel, etc. You may be surprised how committing your budget to paper (and sharing it with a partner or spouse!) will help to make you (all) accountable and increase the chances you will stick to your plans.
It is vital that your Budget is realistic! If it is not achievable, you will find yourself falling behind and once again, the weight of building debts will get you down. Be sure to budget for the worst case scenario, so if things end up on the positive side, you get an extra free kick along.
Once you’ve done this, look at what you have left over each month and see how much of this you can afford to put towards extra debt repayments.
3. Prioritise your debts!
Rather than making minimum repayments across all debts, rank your debts from highest to lowest based on the interest rate being charged, and then you can focus on paying the highest rate ones first (such as those credit cards).
On the other hand, also consider paying off small debts that you can actually completely eliminate quickly. This way you will have the satisfaction of being able to cross some off the list entirely and feel like you are making headway. This can also assist to simplify your list of debts, so it may be a bit easier when it comes to talking to them, or trying to consolidate them, if required, down the track.
4. Use direct debit
Rather than trying to remember to make multiple repayments by each due date, set up direct debits so that what you owe comes out automatically. This will ensure you won’t forget any and therefore avoid late payment penalties.
Importantly, you need to make sure you have enough funds in your account to cover each repayment on the date it is debited. If you’ve already drawn up a budget, and are sticking to it, this shouldn’t happen.
5. Talk to your creditors!
The first major external step to take if you’re really struggling to keep up with debt repayments is to let the creditor know.
You may be surprised to find that they will appreciate your honesty and that you are being proactive. They may be willing to negotiate alternate repayment terms, give you an interest free break, give a principal discount for a prompt payment, or otherwise just grant some additional time to catch up.
You can also formally ask for “hardship assistance”. Larger creditors will normally have a formal set of criteria which you may need to meet to qualify (e.g. you have lost your job or suffered an illness or injury). This can result in a loan freeze where you pay no interest for a certain agreed period.
If you can’t come to an agreement with your creditors and you think they are being unreasonable, you can make a complaint to the Australian Financial Complaints Authority (AFCA). AFCA can often force a financial institution to take certain steps in dealing with you.
6. Debt consolidation
If you still have reasonable credit history, a great step is to consolidate your debts. This may mean taking out a personal loan or extending your mortgage to pay off high cost debts like credit cards, then paying the loan back over a fixed-term with a lesser, stable interest rate.
Not only is this a good way to reduce multiple debt stress because you only have to make one monthly repayment, but the interest rate on these types of loan is usually much lower, meaning repayments may be reduced to a more manageable level.
You can also try to do a credit card balance transfer, which involves moving credit card debt to a provider that offers a 0% rate on balance transfers for a certain period.
7. Seek reputable professional advice
If the problem seems too big for you to handle, seek expert advice! Obtaining assistance from a reputable financial counselor is worth its weight in gold! Look for the not-for-profit organisations, like the National Debt Helpline, www.ndh.org.au, and watch out for those late night TV and radio advertisers, or flashy website links, that promise the world but often won't give you the time of day until you have paid them money up front or signed up to some kind of “plan”. These are often the unregulated and sometimes unscrupulous “untrustworthy advisors” that Government regulators like ASIC and AFSA are trying to crack down on. There is a reason they can afford all that expensive TV or Google advertising!
8. Formal steps
If your debts problems are insurmountable and look like they need a formal resolution, then a reputable licensed insolvency practitioner should usually meet with you and provide you with up to a few hours of free expert advice, with no obligation. (see members of the Association of Independent Insolvency Practitioners, www.aiip.org.au ).
If required, several alternate formal steps are available under the Bankruptcy Act. These include Debt Agreements, Personal Insolvency Agreements and Bankruptcy. There are some great resources explaining these options at the Government personal insolvency regulator’s website, www.afsa.gov.au.
Whilst never to be entered into lightly, formal personal insolvency arrangements are not the “end of world” scenario you may think. Bankruptcy puts an immediate freeze on all of your debts and allows you to completely clean your slate! We regularly see a huge weight lift of people’s shoulders, once they have made a decision to go down a formal path.
A licensed insolvency practitioner will take you through the costs and benefits of each of the available options, and assist you to choose the one that best suits your situation.
We sincerely hope these tips will assist you to get your debts under control. With focus and attention, you will get there!!
If you need to chat, contact us today for a free, no-obligation discussion.