Consumer Credit Issues

Do you understand debt and what can go wrong ?

As Australians continue to soak up easy money with alarming ease, debt counsellors are beginning to warn of an increasing number of calls for help. At the same time, many are calling for greater education about the options available for those facing repayment difficulties.

Consumer Credit Legal Services Sue Mahalingham says her organization has noticed a significant increase in calls over the past 12 months. With concerns that interest rates likely to rise in the future, she feels that Bankruptcies and “formal debt repayment arrangements” are likely to increase.

“We are very concerned that a large number of people are close to the edge already. Unexpected expenses like a car break-down or even the loss of income such as over-time or bonus payments has been enough for some to find themselves in financial difficulty” says Ms Mahalingham.

According to the Federal Government’s Insolvency and Trustee Service, the number of bankruptcies and formalised debt repayment arrangements under their jurisdiction rose from 509 to 527 in the same March Period from last year.

Whilst Bankruptcy should always be regarded as a last resort, borrowers facing difficulties need to be aware of what options are available to them. In some cases, the options available may not be made clear.

“In many cases, the bad or doubtful debts are sent out for debt collection agencies to recover. Borrowers might feel pressured into accepting arrangements by a third party who’s sole function is to recover the debt in full and not necessarily explain what arrangements can be made” says Ms Mahalingham.

Many loans in Western Australia are written under the Consumer Credit Act which sets out the rights and responsibilities of borrowers and lenders alike. The Act generally applies to individual loan contracts for personal purposes.

The Act does not apply to utility and service providers such as telephone companies who may provide credit but in most cases, they will have documented procedures which are followed when an account is seriously in arrears.

For borrowers facing difficulties, lenders are firstly required to formally notify the borrower that they are in default and have 30 days before “enforcement proceedings” will commence. This period is to allow the borrower to attempt to correct the problem or to possibly come to some arrangement with the lender.Under the Consumer Credit Act and if the loan is less than $125,000, the borrower can attempt to enter into an arrangement to repay the loan which departs from the original terms.

The arrangements under Hardship Provisions of the Act might include reduced payments, “freezing” of interest and other charges or a combination of steps. If the lender believes the compromise proposed by the borrower is unreasonable, the matter can be referred to an independent body which can rule on the agreement or bind both parties to some other arrangement.Where the loan exceeds the $125,000 hardship cap or cannot otherwise be considered under the Consumer Credit Act, the Bankruptcy Act may apply.

In this case, there are a number of options available, many of them similar in concept to provisions within the Consumer Credit Act.

Whilst complete Bankruptcy might appear to be the easy option for some, the long term damage to reputation shouldn’t be underestimated as well as the impact on a Bankrupt’s day to day life-style. Bankrupts cannot borrow more than $4029 without disclosing they are an undischarged bankrupt, own any property, be a Director of a company, own tools of trade valued at more $2,900 or transport valued at more than $5,800. A single person who is bankrupt cannot earn more than $35,271 before seeing a portion of income paid to creditors, nor can they travel overseas without the permission of the Courts.

Bankruptcy usually lasts for 3 years with provision for this period to be extended. Most lenders will ask applicants for finance if they have ever been bankrupt and thus, the effects of bankruptcy can last forever.

Differing arrangements within the Bankruptcy Act are often referred to by the section dealing with them. For example, a “Part 9” agreement relates to that section of the Act dealing with arrangements for those with a gross income of less than $52,907 per annum whose unsecured debts are less than around $70,500. Providing 75% of creditors agree to the arrangements, Part 9 debt repayments may be one way out of difficulties. In this case for example, you could agree to pay a reduced amount for a specified period of time to discharge your debts. Part 10 arrangements have no set limits imposed and differ to part 9 arrangements where debt can be exchanged for assets such as property in addition to ongoing repayment arrangements.

Lenders benefit from Part 9 and 10 arrangements because there’s usually a chance of recovering more funds than if they move to full Bankruptcy.

Nonetheless, Sue Mahalingham advises that anyone facing difficulties needs to deal with the matter before it gets out of hand.

“You stand a much better chance of coming through the process with much less stress if you are up-front will all of your lenders. Whilst you can’t run away from your obligations, you may be able to negotiate a much more acceptable outcome to yourself and the lenders.” Says Sue Mahalingham

“Lastly, don’t compound your problems by getting involved in companies that charge fees to help you with your situation. There are excellent debt counsellors available through most Local Government Authorities”. Says Sue Mahalingham Contact the Financial Counsellors Research project on 08 9221 9411 or visit the web-site at www.fcrp.org.au

If your financial planner doesn't know about this, then perhaps you should find a planner that does. This is "standard advice" for clients of N.C. Bruining & Associates