What you can do
Information about steps you can take when debt gets out of control
No matter the extent or cause of your financial problems, it is never too late to start fixing them. If you don't, your debts will continue to accumulate interest, you will run the risk of losing assets secured against the debt, you could end up with a tarnished credit report and you may be taken to court. The following basic steps show how easy it is to regain control over your financial affairs.
Step One: Evaluate your current financial position
Write down your monthly income (including any types of government assistance), your monthly expenses (eg. rent, transport, food, mobile plan, car maintenance, child care) and your monthly debt obligations (eg. credit card repayments, mortgage repayments, car repayments).
Next, work out whether your total monthly income covers both your expenses and minimum monthly debt repayments. If this is the case, then regaining control over your financial affairs is just a matter of keeping track of your 'incomings' (income) and 'outgoings' (expenses and debt repayments). Work out whether you can increase your repayments to creditors or allocate more money to your savings account.
If you find your 'outgoings' are bigger than your 'incomings', go to Step Two.
Step Two: Consider alternatives
If you calculate that your earnings aren't enough to meet your needs as well as your financial obligations, consider whether you can:
- Boost your income. Is a second job a feasible option? Make enquiries as to whether you are eligible to receive a pension, benefits or other types of financial assistance. Ask your relatives or close friends whether they are willing and able to help you financially.
- Decrease your expenditure. Use cash instead of your credit card and cut down on interest charges. Keep entertainment and luxury expenses to a minimum.
- Refinance your debts. Look at the option of getting a loan with a lower interest rate or consolidating all your debts into one lower-interest loan. (For more information on refinancing and debt consolidation loans, refer to Refinancing and debt consolidation.)
If there are no options available for you to improve your financial situation, go to Step Three.
Step Three: Contact your creditors
Contact your creditors immediately and tell them that you are struggling financially. Follow up your call with a detailed letter explaining your financial situation, setting out all your financial commitments and stating how much you can afford to pay and how often.
In your letter, ask them to allow you to enter a repayment plan involving:
- reduced payments; and/or
- a suspension of payments for a specified period; and/or
- a reduced rate of interest.
They might even be prepared to settle the total debt providing you make a lump sum payment of a substantial part of the debt.
Ask them to put their response in writing so that you can show that you have tried to reach an agreement. Make sure that you can realistically meet the terms of any repayment plan that you propose. Don't be pressured into accepting a repayment plan that you know won't work for you. If you prefer, you can ask a financial counsellor to compose and send off this letter to your creditor on your behalf.
While you wait for a response from your creditor, continue to make payments at a level that you can afford. If your creditor does accept your proposal, confirm in writing the terms you have agreed on and ask them for their written confirmation also.
It is very important that you stick to the terms of your new 'contract'. If your financial situation does not change for the better as anticipated (due perhaps to prolonged illness or prolonged unemployment), you may need to contact your creditors and negotiate another repayment plan that better suits your needs. It is recommended that you also inform creditors of any positive financial developments such as a new job or returning to work. They are more likely to be prepared to cooperate with you if you can show that your financial situation is improving.
If you are unsuccessful in negotiating a repayment plan with your creditor, go to Step Four.
Step Four: Are you eligible for credit relief?
If the reason behind you needing a repayment plan is short-term financial difficulty (such as acute illness or temporary unemployment), and you have written proof that your creditor is not willing to adjust the terms of your contract, and you borrowed less than the 'current hardship threshold' figure, you may be eligible for credit relief.
If you are experiencing long-term financial difficulty, you should contact the Financial Counsellors Resource Project to arrange an appointment with a local financial counsellor and/or speak to the Consumer Credit Legal Service (CCLS) WA to get legal advice.