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Bankruptcies at 24 year low; how you can stay on top of debt

Bankruptcies at 24 year low; how you can stay on top of debt

Falling into debt is a reality that many Australians are living in – but they’re fighting back. With bankruptcies at a 24-year low, it’s clear there are more ways than ever you can stay on top of your debt.

According to the latest personal insolvency statistics from the Australian Financial Security Authority (AFSA), bankruptcies were at their lowest level in the March 2019 quarter since the March 1995 quarter.

Bankruptcies fell 9.2 per cent to 3,765 in the March 2019 quarter compared to the March 2018 quarter – and these figures fell across all states and territories besides the Australian Capital Territory.

In terms of debt agreements in this same time period, there was a drop of 31.5 per cent to 2,552 across all states and territories.

Total personal insolvencies also fell 19.4 per cent in the March 2019 quarter compared to the March 2018 quarter.

The good debt

Believe it or not, there is actually good debt. Good debt is considered an investment that will grow in value or generate long-term income – such as a home loan.

If you want to get on top of your home loan, there are a few ways you can pay it off faster:

  1. Make more frequent payments – switching from monthly to fortnightly or even weekly repayments can help you to reduce your principal owing, so you shorten your loan life and ultimately pay less in interest.
  2. Make larger repayments – if your loan allows you to make additional payments, lump sum payments or increase your repayment amount, this is one way to reduce your principal and shorten your loan length.
  3. Refinance, but keep making the same repayments – switching to a more competitive interest rate will allow you to reduce your loan interest and therefore your repayment amount. However, if you were to continue making the same amount in mortgage repayments, you’ll help to pay off your debt much faster.

Low rate home loans

The bad debt

Bad debt may seem a little more obvious. This type of debt is usually provoked by purchasing things that lose their value and do not generate long-term income or carry high interest rates, like a credit card or pay day loan.

Signs you may have a debt problem include:

  • More than 20 per cent of your spending money is going towards loan and credit card payments
  • You’re only making minimum repayments
  • You’re being declined credit (new loans, credit cards etc.)
  • You’re borrowing money to pay debts
  • You’re missing payments
  • Debt collectors are chasing you

Don’t feel discouraged – there are options available for you to help you get your head above water.

Firstly, organise your finances and make a plan. Do a financial health check and examine what debts you owe, who you owe them to, how much they are, how much are you paying back, their interest rates and due dates. This will help you to prioritise the debts to focus on first.

If you have multiple sources of debt, the general rule of thumb is to consider paying the debt with the highest interest rate first. If you choose to take this route, you will help to put a stop to your debts snowballing out of control from high interest charges. The longer you take to repay a high interest debt, the more repayments you’ll have to make and the worse your financial position will become.

Once you’ve made a plan, talk to your creditors. You’d be surprised at how accommodating they may be – even allowing you to pause repayments momentarily or help you organise an easier repayment plan. Loan or credit card providers typically can offer hardship solutions, so pick up the phone and see what’s available.

If you’re still struggling to make repayments, consider looking into whether a debt consolidation loan could provide some breathing room for your finances. This is a type of personal loan that allows you to borrow a lump sum to clear your existing debts with. You will end up with just one loan to pay back, simplifying your budget and hopefully making repayments more manageable. 

Debt consolidation loans

Read more…

The ugly debt

If your mountain of debt has grown into something you no longer believe you can pay, you may want to consider applying for bankruptcy.

ASIC’s MoneySmart website advises that you should only do this if you’ve explored all other options and seek legal advice or financial counselling before doing so.

According to ASIC, bankruptcy is a process in which you are “legally declared unable to meet your debts. When you apply for bankruptcy you will be released from most of the debts you owe, and debt collectors will stop contacting you”.

Once you are declared bankrupt, you are classified as bankrupt for 3 years and a trustee is appointed to look after your affairs.

Bankruptcy can impact your eligibility to get credit in the future. It will be listed on your credit report for two years from the date your bankruptcy ends, or five years from the date you become bankrupt (whichever is later). It will also appear on the National Personal Insolvency Index (NPII).

What you need to know about bankruptcy:

  1. If you earn over a set amount, you may need to make compulsory payments to your trustee.
  2. You may be restricted from travelling.
  3. You may have restrictions on your employment and running a business.
  4. This won’t release you from all your debt – most unsecured debts are covered by bankruptcy, but there are some exceptions.

Do you need help?

If you’re struggling with financial hardship, you can find financial guidance and advice at the Australian Securities and Investments Commission’s (ASIC’s) MoneySmart website.

This includes access to free financial counselling and MoneySmart’s National Debt Helpline: 1800 007 007.

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Fact Checked -

This article was reviewed by Property & Personal Finance Writer Nick Bendel before it was published as part of RateCity's Fact Check process.



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Learn more about personal loans

What are the pros and cons of debt consolidation?

In some instances, debt consolidation can help borrowers reduce their repayments or simplify them. For example, someone might take out a $7,000 personal loan at an interest rate of 8 per cent so they can repay an existing $4,000 personal loan at 10 per cent and a $3,000 credit card loan at 20 per cent.

However, debt consolidation can backfire if the borrower spends the extra money instead of using it to repay the new loan.

Can I repay a $3000 personal loan early?

If you receive a financial windfall (e.g. tax refund, inheritance, bonus), using some of this money to make extra repayments onto your personal loan or medium amount loan could help reduce the total interest you’re charged on your loan, or help clear your debt ahead of schedule.

Check your loan’s terms and conditions before paying extra onto your loan, as some lenders charge fees for making extra repayments, or early exit fees for clearing your debt ahead of the agreed term.

How do I consolidate my debt if I have bad credit?

The worse your credit history, the harder you will find it to consolidate your debts, because lenders will be less willing to lend you money and will charge you higher interest rates.

However, people with bad credit histories can make debt consolidation work by following this three-step process:

  1. First, find a lender willing to give you a bad credit personal loan. This process will be simplified if you go through a finance broker or use a comparison website like RateCity.
  2. Second, make sure the interest repayments on your new loan are less than the repayments on the loans being replaced.
  3. Third, instead of spending those savings, use them to pay off the new loan.

Can I merge my personal loan with my home loan?

Yes, you can refinance your home loan and, in the process, merge or consolidate your personal loan and home loan. By doing so, you can lower the number of debts you have, and you may also reduce the total interest you have to pay.

However, you should consult a financial advisor or a mortgage broker to confirm that you are decreasing your total outstanding debt, including interest payments. The repayment term for a home loan can be much longer than that for a personal loan, and by merging the two, you could be repaying a higher amount over the full term.