Debt Strategies

Successful debt relief comes with a plan. Understanding reduction strategies is the first step in tackling debt.

Overview of debt relief options

Many Australians find themselves struggling with large amounts of debt with no way to comfortably manage it. An unexpected change in income, emergency, relationship breakdown or other unforeseen event can cause severe financial stress.

Below are popular debt relief strategies for addressing debt.

What It Is?

The Upside

The Downside

A service that is free and confidential, Financial Counsellors offer information and advice to help you understand your options and develop plans so that you can reduce debt and/or manage on your income.

True financial counselling is independent from creditors and lenders i.e. Providers may be charity organisations, certain government departments, and some community centres.

  • Independent
  • Free
  • Confidential
  • Supportive
  • Tailored to your personal situation
  • Access to a wide range of different strategies, services and support
  • Available face to face or over the phone
  • They don’t lend you money
  • They won’t recommend any particular credit product

Taking out a new Personal Loan and using the funds to settle all of your smaller debts.

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  • Easier to manage – One debt/one creditor/one regular repayment
  • Can be cost saving if the new loan has a lower interest rate
  • Predictability of payment schedule and the amount due
  • You may be tempted to take on more debt
  • You usually need a good credit history
  • You may need to secure the loan, which can place your assets at risk
  • There may be additional costs involved such as set up costs and exit fees
  • You still pay interest & existing facilities (such as credit cards) are not automatically closed

Mortgage Refinance
(to consolidate debt)

Replacing your current mortgage with a new mortgage. The new loan is large enough to pay out your old loan as well as your other debts. You then have just one creditor and one regular repayment.

Refinancing can be done through your existing lender or a new lender.

  • Easier to manage – One debt/one creditor/one regular repayment
  • Usually a lower interest rate which can save you money
  • This is a secured loan, meaning that you need to already have a home loan, and that home can be at risk if you don’t repay the mortgage
  • You may be tempted to take on more debt
  • It may take you longer to pay off your home
  • You usually need a good credit history
  • There may be additional costs involved such as set costs and exits fees
  • Your equity is reduced when debt is absorbed into the mortgage

A legal contract negotiated between you and your creditor/s with the help of an Administrator. A Debt Agreement can happen when both you and the creditor agree that you cannot pay all of the existing debt. Instead, you agree that you will repay a part of your debt through regular instalments within a set period. Once the reduce debt has been repaid, you are released from the balance of that debt.

This option may be used by people who can no longer afford to pay all of their debt, but who wish to avoid bankruptcy.

  • The amount you owe is reduced
  • Once the agreed amount is paid, the entire debt is resolved
  • The debt is paid off more quickly than it would be if only minimum payments are made
  • Provide protections, such as relief from harassment – no more debt collection
  • One, affordable payment based on your capacity to pay
  • Interest, fees and charges are frozen
  • Eligibility criteria means it is not for everyone
  • Legally binding and can be used to enforce bankruptcy if you don’t pay
  • Carries various legal obligations that can impact on your work or business
  • Impacts on your ability to get future credit
  • Not all kinds of debts can be covered
  • Appears on your credit report for at least 5 years
  • Your details are publicaly recorded temporarily

Similar to a debt agreement, but without the same legal force. It does not involve an Administrator, instead you negotiate with your creditors yourself, or with help, to work out a solution to make your debt more manageable. This might mean you agree to things like a longer period to pay off the debt, a reduced interest rate or a reduction in the debt itself.

  • Shouldn’t affect your credit report if you haven’t defaulted
  • Doesn’t require a legally binding agreement
  • Relies on both parties keeping to the agreement
  • Dealing with creditors can be difficult or intimidating
  • Agreements may not be binding
  • One missed payment may cancel the agreement

A legal process where a person who cannot pay their debt hands control of their finances to a legally appointed Trustee. Bankruptcy protects you from creditors and releases some of the debts that you cannot pay.

There are many consequences to bankruptcy including a loss of assets and a loss of control of your finances.

  • Certain Debts are cleared
  • Creditors cannot pursue you
  • The Trustee works to ensure the fairest outcome for all
  • Your details are publically recorded
  • Your assets can be sold
  • You are under many restrictions and obligations during the period of bankruptcy, which can last for several years
  • Your ability to get future credit is impacted
  • Can affect your future employment or operation of a business
  • Not all debts can be released and will still have to be paid
  • Your assets can be sold

DIY

Devising your own solution to manage and discharge your debts.

Examples include developing a budget, a debt repayment plan, and negotiating directly with creditors.

  • Free
  • May avoid impacting on your credit history
  • Creditors may not negotiate
  • Amount owed is not reduced

When it comes to debt relief many don’t realise that there are numerous reduction strategies available and that many may qualify for multiple solutions. There’s more to debt relief than balance transfers and debt consolidation loans. Having success with paying down debt comfortably is identifying which strategy works best for your situation and expectations.

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