A heavy debt burden can seem like a life sentence to struggling households but there are ways to climb your way out of debt without going bankrupt, or your family and friends knowing about it.
Often the hardest step is telling someone, because many people don’t want their friends, neighbours, colleagues or even family to know about it. However, a new self-help program launched by Financial Counselling Australia could be a much-needed lifeline to people struggling alone with the problem.
The debtselfhelp.org.au website is a DIY service with no login or password needed so it can be completely anonymous. By answering a series of easy questions, it provides solutions to suit your situation. It then lists likely outcomes and what to do next, as well as contacts of organisations and people best suited to help.
Financial Counselling Australia chief executive Fiona Guthrie says the only hard thing about getting out of debt is making a start to be rid of it. “Many people make the easy decision to ignore it in the hope it will somehow magically fix itself,” she says.
One of the major reasons for not seeking help is a fear of not knowing what will happen. “We know heaps of people can advocate for themselves if they can just get their fingers on the right information. “Our aim is to ensure that people in financial difficulty get the best information they can.”
In the spirit of helping yourself, we asked industry experts for a step-by-step guide to digging yourself out of debt.
1. IGNORANCE IS FATAL
Credit reporting company Dun & Bradstreet says one in three Australians are expecting to have difficulty paying their bills this year, but chief executive Gareth Jones says the worst thing you can do is continue to ignore the problem. “The interest charged on credit doesn’t go away, so the longer you wait, the bigger the problem can become,” Jones says. “If you ignore your debt, even small amounts, you also risk having adverse information recorded on your personal credit report. This can then impact your ability to borrow again for years after you’ve sorted out your finances.”
Budgeting company MyBudget founder Tammy May says debts can “snowball” very quickly, getting bigger and more dangerous as they keep accruing interest and penalties. “Talking to someone about the financial stress can be the first step to getting on track, so don’t be afraid to pick up the phone and get some free advice,” May says.
There is free online information through MoneySmart.gov.au and debtselfhelp.org.au, and Financial Counselling Australia operates a phone help service on 1800 007 007 where you can speak directly to a counsellor.
2. TAKE STOCK OF IT ALL
Make a list, or a pile, of bills and debts, IOUs and all other financial commitments, overdue, current and expected. “You can’t create a plan without the full picture of how much you owe and when it’s due,” D & B’s Gareth Jones says. Order a copy of your credit report and once you have the big picture, work out your living costs.
Be honest with your spending, write each item in a notebook, no one is going to judge you but it will help identify areas where you can improve or save money. “Keep some sort of spending diary to track what is coming in and what is going out. It might seem like a lot of trouble at first but it can be very revealing in terms of identifying spending habits,” Guthrie says.
3. KNOW YOUR LIMIT
“It’s important to work out how much you can realistically afford to put towards your repayments, taking into account living costs,” Guthrie says. “This should help you make affordable arrangements rather than offering amounts that you are not likely to be able to maintain.” Once your know your living costs, the next step is to work out how much you have remaining each pay period to put toward bills. Or you can work in reverse. Calculate how much you must repay each pay period and then work out how is left over for living costs.
4. WHO TO PAY FIRST
Pay the debt with the highest interest rate first, MyBudget’s Tammy May says. This includes credit cards or personal loans. There are good and bad points to using a credit card transfer which offers an interest-free starting period.
It can improve your cash flow because the minimum repayments are reduced during the honeymoon period, but this does not fix the underlying problem. Disciplined repayments are required for this strategy to work as well as no new spending. All our experts say you should always contact all the organisations and people you owe money to and request a repayment plan based on your estimate of how much you can afford.
Most creditors will be willing to work with you, but some can be quite aggressive and if you are unsure, so don’t agree to anything until you’ve got advice from a counsellor.
5. LEFT A BIT SHORT?
If your income is not enough to meet your living costs and also make all your debt repayments, your best option is to get specialised advice. Free financial counselling is available through Financial Counselling Australia and other social services including Centrelink, charities and many local councils.
There are many options available, including debt negotiation, debt consolidation or redrawing on a mortgage. However, these choices also involve paying interest. A qualified financial counsellor can often negotiate extra time to make repayments without necessarily involving paying interest or penalties.
“Communication is the key, as this will show good faith and keep creditors up to date with your situation,” May says. “What ever you do, don’t bury your head in the sand. “The problems won’t go away and more often than not will snowball with late fees added, disconnection fees and repossession.”
A FINAL WORD – BEWARE!
“Avoid borrowing money to get out of debt and be careful with consolidation loans,” Jones says. Consolidation loans are simply a means of combining debt, you could end up losing everything because you’ve tied it all up in one loan.”
Credit repair companies can also charge a lot of money for services you can do for free or arrange yourself, Guthrie says.