What to do when debt becomes too much

Are your debts out of control? Are you struggling to pay your bills? This predicament is stressful for just about anyone. Especially if the stress includes potentially losing your home and/or avoiding debt collectors. If and when this happens, it can be difficult to know how best to manage the situation. First, remember that you're not alone. Here are some tips to help you alleviate the stress of your debt situation.

Sherpa's 10 tips to cope when debt becomes too much

1. Don’t ignore the situation

Despite what your mother may have told you ignoring it will not make it go away.  Identify where you are and what you can do.  Do not beat yourself up about how you got there.  Today is the start of the future.

People you owe money to will get more upset if you ignore them.  You will be pleasantly surprised with what can happen when you engage positively.

2. List your debts

Start by listing everything you owe.  Just writing it down can be quite cathartic.

Draw up a table showing who you owe, how much you owe them, any minimum payments required, any interest rate that applies, whether or not you have given them security (like a mortgage on your house or hire purchase on your car) and any special arrangements you may have made with them to pay the debt off.

Now list the assets (like your home) you could sell.

Subtract the total of your debts from the total of your assets and write down the result.

• If the answer is a large negative number, it will take you more than 5 years to repay (ignoring your home loan), the balance is growing month by month or you are getting calls from debt collectors, then you need to get professional help fast (see point 10).

• If the answer is positive (your assets exceed your debts) there will usually be a positive way out.

3. Don't make it worse

Now that you’ve worked out where you are, now you need to make sure it doesn’t get any worse. Forget everything I’ve told you about sustainable budgets. This is a crash diet. Be ruthless with your spending. If it can wait till tomorrow, wait. Cut, cut, cut.

Stop using your credit cards or line of credit. Don’t cut them up – you might actually need them at some point. But put them somewhere you won’t be easily tempted.

Before the introduction of chip and PIN, I used to suggest that clients freeze the cards in a block of ice and keep them in the freezer. I haven’t tested whether this will affect the chip!

Do what works for you.

4. Don’t borrow to pay bills

If you owe money on medical bills or utilities (like water, phone or electricity), don’t borrow to pay them.  Most of these providers will readily agree to a plan to pay them by instalments.

5. Ask yourself: Is it really temporary?

Debt problems are more often than not caused by unemployment, sickness, accident and relationship breakdowns.  Usually these are temporary blips, so  temporary relief or a payment plan will often be enough.

Occasionally, however, the problem is more permanent.  Business failure, addictive behaviour (gambling, drugs and alcohol) or more permanent disability are the usual causes here.  These cases will require a more permanent solution.

Sometimes an early decision to sell your home can solve a lot of problems.  Better you sell it than the bank.  Just don’t rush into it.

Which situation are you in?  How long do you need to recover, find another job or adjust your expenditure to your new financial situation?  Be realistic.  Better overestimate how long you need than underestimate.

6. Prioritise Debts

Make at least the minimum payment on each debt if you can.

If you can’t (even after cutting expenses); then focus on secured debts first. Then turn your attention to keeping up your payment plan on utilities and finally on your unsecured debt.

If you have a number of unsecured debts, it is usually best to concentrate on the small ones.  These are easier to pay in full which will reduce the number of debts on which you are incurring fees and charges.

7. Debt Consolidation

Sometimes, it can make sense to roll all of your debts into your home loan.  This will reduce the amount you need to pay each month.  However, it also turns unsecured debt into secured debt and put your home at greater risk.

It is great at buying you time and works well if you have lots of equity in your home.

You need to do this early, before you build up arrears.  If you have defaults or are behind on other loans it may not be possible. Find out whether Debt Consolidation is for you

8. Communicate with Creditors

Once you have established the extent of the problem and the time frame you need to fix things talk to your creditors.

Most will agree to a payment plan.  They will generally be happy that you have taken the time to engage and will look for ways to get their money without having to resort to lawyers.

Make sure that you really can keep to the plan you agree.  Creditors will be less forgiving for failure to meet a payment plan than failure to pay the original debt.

This is especially true for telephone companies who tend to be a little trigger happy with seeking judgments of debts due.

If the problem relates to a loan, lease or hire purchase the law provides a process for dealing with hardship.  This can include extending the loan period to reduce your payments or reducing or postponing repayments for an agreed period.

9. Avoid the Vultures

There is a range of people who prey on those having trouble with debts.  They will promise to help but will end up costing you a fortune in fees and potentially loss of your home.  Many will try to pressure you to sign up for a debt agreement or bankruptcy.  This can generate a lot of fees for them but can be expensive for you and harm your credit for years to come.

Sometimes a debt arrangement or bankruptcy is the best option, make sure you get unbiased advice (see point 10)

10. Get Help

Don’t think you need to do it all on your own.  Ask Your Sherpa.

For more serious cases you should consult a debt counsellor. These are independent and highly regulated. Most are operated by not for profit organisations. Your Sherpa can provide details.

Alternatively you can call toll free 1800 007 007 or go to http://www.debtselfhelp.org.au/

If you need more than financial help, consider Lifeline on 13 11 14 or www.lifeline.org.au

The most important thing is to act early and get the right help.

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