Recently I wrote about personal insolvency statistics revealing an increase of 5.6% between 30 June 2017 to 30 June 2018 and that the increase should not be easily dismissed given the present and emerging landscape when considering a lack of real wage growth, increasing living costs and increasing mortgage costs. This article will discuss what you should do if you can't pay your debts.
All too often when individuals get into financial difficulty (which could be from unemployment, ill health, relationship breakdown or economic conditions), they look for the easy way out. After all, we all want the quick fix, don't we?! That could be in the form of getting yet another credit card(s), a loan from a family member / friend, seeking a payment from their superannuation account on hardship grounds and the list goes on (noting it could be a combination of any, or all of the above). Relevantly though, because the individual has looked for the easy way out, quite often if other changes are not made, their financial position will continue to deteriorate.
Whilst there is definitively no shortage of on-line tools and apps to apparently help us manage our finances - how many of us actually use them? I suspect the take up rate is relatively low. Let's face it, making a strategy and budget, and trying to stick to them is not overly exciting and there will always be other distractions. However, having worked with and assisting many individuals that have been through financial difficulty and rebuilding their financial health, it is obvious that the moment the financial crisis starts managing the individual, is also the moment they start to lose effective control of their affairs and cannot see that there really is a light at the end of the tunnel.
Taking the easy way out will not deliver the outcomes you are seeking to either re-establish and build wealth or continue to build upon existing wealth. With all the noise out there and slick marketing and financing options promoting "quick fixes", it is easy to see why such options are appealing, but without other critical changes, they are likely to be to no avail.
So, What Should You Do If You Are Struggling To Pay Your Debts?
- Firstly, honestly answer whether you have a documented 2/3-year strategy and budget and regularly review it! If you haven't, then you need to develop these documents. Every successful business owner knows that the strategic plan lays out the direction and goals of the business and the actions to achieve those goals, whilst the budget looks at the money required to support achieving the goals. These documents need not be overly exhaustive and indeed depending on the level and age of the outstanding debts, such exercise might need to be done swiftly and with a focus on the immediate period, i.e. 0-12 months and revisited when you have more control of your financial affairs. Also, don't just prepare the strategy and budget and put it away - it must be visible and something that you initially cannot avoid until it becomes part of your routine.
- Use free and reputable tools such as www.moneysmart.gov.au/managing-your-money/budgeting to help get you started. This will at least give you an idea of your present position. It is important that you be honest and accurate when doing this evaluation. From here, you are quickly going to be able to see how all the money is spent - you might be surprised! I recommend that if you have actionable creditors that need to be immediately dealt with (see point below), that you also consider and commit to making decisions to reduce (sometimes immediately) unnecessary expenditure until you get back into a position where you are regularly saving a portion of your income (whether that be weekly/fortnightly/monthly). Do you really need the Netflix subscription, unlimited data plans, can you limit how many coffees you buy each day, can you take your snacks/lunch to work, do you need the new motor vehicle on finance or can you do with a cheaper alternative and what about private school fees? These are hard decisions, but at the end of the day we need to "cut our cloth according to what we can afford".
TIPS when struggling with your debts:
- Avoid doing nothing: the longer you leave it, the harder it becomes. Take action as difficult as this may be. I have seen first-hand the paralysis that sometimes overcomes individuals when the financial crisis starts managing them. The unopened emails/mail containing overdue notices, demands, statements of claim, etc
quite often represent the inability to cope with the pressure you are under. If you can't make repayments or keep up with payments on a credit card, home loan or utilities, then talk to your credit provider as soon as possible and let them know you are experiencing financial hardship. If you have prepared a budget you will also hopefully be able to work out what you can afford in repayments - so have the budget handy when making these enquiries.
- Talk about your financial position with your spouse/partner/confidant or professional advisor and enlist their support: sometimes there can be a guilt factor felt by individuals in this position - but typically keeping it to oneself in my experience makes the position worse. Remember a problem shared is a problem halved.
- Consider debt consolidation/refinancing - but ask yourself the question - have you dealt with the issue that substantively caused the financial crisis initially? Do you have a strategy and realistic budget in place now? Also, strongly consider getting independent legal or other professional advice on whether moving down this path is right for you - and not from a broker that is motivated to get you into the product and earn a commission from the transaction.
- Beware of slick marketing campaigns that make unrealistic promises. These sound great when we are financially and emotionally vulnerable, but quite often they lock you into opaque payment structures that can run for long periods of time. Quite often there are other, better options to consider.
- You can initially seek support from a financial counsellor which is a free service offered. They can help you get a clear picture of your situation and provide information about your options. See www.financialcounsellingaustralia.org.au or call the National Debt Helpline on 1800 007 007.
- If your debts have accumulated to a level (in excess of $100,000) where they may not be serviceable via hardship provisions/ repayments plans or you have advanced recovery actions against you, such as statements of claims, director penalty notices or bankruptcy notices, then you should seek urgent professional advice. At Jones Partners we help individuals get the right advice and take the first step so that they can re-build their wealth and get a sense of relief regarding their financial position so that the crisis is no longer managing them.
Financial difficulty is nothing to be ashamed of or frightened about. It can happen for any multitude of reasons. What is paramount is to formulate a proper plan to deal with it and the sooner this is done, then the phone-calls and overdue emails/texts/letters can stop. Taking the first step is often the hardest.
Jones Partners offers an initial free consultation for individuals in financial difficulty so that they can be assured they are receiving the right advice about the options available to them.