What to do when you can’t pay your debts

Falling behind with bills or instalments can be really stressful. But whether it’s through a loss of your job, a relationship breakdown or out-of-control credit cards, ignoring the problem of mounting debt is never going to make it go away.

You might be feeling overwhelmed about it all, but take a deep breath because there are solutions, and you do have options. The decision to get yourself financially fit again will be life-changing, as long as you’re willing to make the necessary commitments.

Common problem

A recent report found over half of all Australians are feeling worried about their current financial situation.

Deborah Southon is executive director of Fox Symes, the largest provider of debt solutions to consumers and businesses in Australia. She says the problem is on the rise, and a major cause of debt woes is people taking on too much credit.

“Although the Royal Commission brought some change, we are still hearing from many people who have borrowed much more than they could ever afford to repay,’’ says Southon.

“A relatively recent phenomenon is the rapid growth in the number of consumers who have debts with one or more ‘buy now, pay later’ companies.

“This is a relatively new form of credit, doesn’t require a credit assessment, and it’s popular with younger consumers who have less experience in managing their personal finances.’’

What to do first

No matter what has led you into debt trouble, the first step to getting yourself out is drawing up a financial plan.

It’s easy to do, here’s what you need:

Gather your data—bills and bank statements, etc.—and make a list of your debts, as well as all your monthly income and expenses.

Working out how much you can afford to pay your creditors each month is key, and having all this information handy will also make any conversations and negotiations much easier going forward.

If you can’t afford to pay anything at all or you’re really not sure, a good first place to turn for advice is the National Debt Helpline. The NDH is a government-backed not-for-profit whose professional financial counsellors offer a free, independent and confidential service.

Level with your creditors

If you can’t pay something, no matter how small, then contact the organisations you owe money to and explain your situation to them.

“In any situation where you are finding it hard to pay your debts, always talk to your creditors first,’’ says Southon.

“Level with them. Tell them you are having difficulties and ask if they can help.’’

Banks and other responsible lenders are required to assist you if you claim financial hardship and tell them your circumstances have changed and you can’t make the repayments.

You’ll find most organisations are more than happy to talk about extending you assistance such as lowering your instalments or freezing interest, fees and charges for a period. Such informal agreements can often resolve overdue debt issues and keep everyone happy without even impacting on your credit score.

However if your problems are more serious or long-term in nature, you may need to investigate legal options for insolvent people, such as bankruptcy. Other forms of insolvency, like a debt agreement, are also available for people who can’t afford to pay their debts.

Who to complain to

If you can’t resolve your differences with your creditors and feel you are being treated unfairly, you can always lodge a complaint with the Australian Financial Complaints Authority, who provide fair, free and independent dispute resolution for consumers as well as small businesses.

Consider refinancing or debt consolidation

Rearranging your debts can provide immense relief. You could avoid excessive fees and eliminate high-interest debt, or it could make life easier by simplifying multiple repayments, perhaps reducing them to make them more manageable.

A debt consolidation loan rolls your existing loans into one and saves you from making several monthly repayments. (NB: Always make sure you’re dealing with a reputable lender, as there are debt consolidation scams that charge set-up fees but never issue a loan).

If you have a mortgage, consider switching home loans. Refinancing your mortgage could save you money and give you breathing space.

A balance transfer credit card lets you transfer your existing high-interest credit card balance to a new credit card that offers a special low or even 0 per cent p.a. interest rate for a fixed term while you get your finances back on track.

Weigh your options

Southon says it is important to weigh all your options carefully before rushing into any financial commitment.

“Consider the pros and cons,’’ advises Southon. “Read all the explanatory information and to ask questions such as ‘what will I be required to pay?,’ ‘how will this affect my ability to borrow?’ and ‘have I considered all the alternatives?’ And be aware of anyone offering a quick-fix solution, because there isn’t one.”

“It takes time, discipline, commitment and effort to get out of debt—but it’s the best investment you’ll ever make.’’

Try our handy personal loan repayment calculator to see how debt consolidation might make your monthly repayments more manageable.

The information contained on this web site is general in nature and does not take into account your personal situation. You should consider whether the information is appropriate to your needs, and where appropriate, seek professional advice from a financial adviser. If you or someone you know is in financial stress, contact the National Debt Helpline on 1800 007 007.