Many years ago, I hit the wall financially.
I'd over-extended with multiple property projects, my employer was going broke, and I'd had to accept a 50% pay cut.
Stressful doesn't begin the describe the world I was in.
A divorce soon followed, and things went from bad to diabolical.
But I learned some valuable (and expensive) lessons.
One of them was how to deal with unserviceable debt levels.
If you're in this situation now, or you see the writing on the wall, I want to give you some hard-won advice.
Firstly, I want to reassure you that if you can’t repay a debt, there are other a few choices available to you.
Local laws and regulations will determine the outcomes, but bankruptcy and debt negotiation are sometimes the only ones.
Before we get to them, though, let me arm you with some other options.
Delinquent unsecured debts like credit and store cards usually sell to collection agencies for a fraction of their face value.
If one of your debts progresses to this stage, you’ll probably have to accept a black mark (default) against your credit rating.
I'm afraid that will have a very real impact on your borrowing capacity (even your eligibility for a phone account) for at least a few years.
The upshot is, you can now negotiate the settlement of your debt for a substantially lower amount.
If you can secure the funds from another source (equity in your home, the sale of assets or a family member) and settle the debt quickly, you might even ask the creditor to write to the credit-reporting agency requesting the removal of your default listing.
The reporting agency in Australia is called VEDA.
Banks can be surprisingly helpful, too.
Most have structured application procedures for debt reduction, and if your situation is genuine, they could reduce the debt owed to them.
Following my post-divorce unpleasantness, two banks agreed to reduce my debts to them by over 40% with no default listing.
It was a life-saver.
Your options might include a reduced settlement value (to be paid in full), a protracted interest-free period or an extended repayment schedule, where the term of the loan gets extended by months or years (and monthly repayments subsequently reduced).
If you have a home loan in arrears, you might be able to switch to interest-only payments for a few years.
In all likelihood, the growth in value of your home will take care of most (if not all) of the principal component you’re not repaying.
After all, most of the repayments in the first 15 years of a typical home loan are interest, anyway.
If you decide to explore the bankruptcy route, just know that it isn’t as simple as waving the white flag and hitting the reset button.
Part of the procedure may include garnisheeing your salary for a portion of your outstanding debts.
When you become bankrupt, a trustee gets assigned to you, and they will manage your financial affairs for the life of your bankruptcy (three years in Australia).
They will also impose limitations on the assets you can hold, even the value of the car you drive.
Many see bankruptcy as an easy way out, and for some, it’s the only way out.
But the effects can last a lot longer than three years - impacting future credit applications, employment and the loss of cherished assets.
‘Phoenixing’ (the intentional transfer of assets from an indebted company to a new company to avoid paying creditors, tax or employee entitlements) was popular with small businesses until the Australian Government decided to focus on this activity. Intentional ‘phoenixing’ is now a jailable offence.
WHAT ABOUT A TAX DEBT?
I know from experience that the Australian Taxation Office is very accommodating when it comes to outstanding debts – with two provisos:
You must open a dialogue with them as soon as you know there’s a problem.
Your debt stress must be genuine, and you must convince the tax office of this.
When I got divorced, my finances took a real beating.
Some of it manifested in a tax debt of around $15,000.
I wrote to the ATO and explained my situation, making a heartfelt plea for debt reduction.
To my surprise, they reduced it by 50%.
A few conditions were attached, but I was more than willing to comply, and before too long, I'd extinguished my tax debt, too.
The bottom line is, you have quite a few options.
None of them are quite as scary as you might think.
But be up front with your creditors.
Describe your situation to them and be authentic in your desire to repair the damage.
Chances are, they'll work with you to make good on that desire. They might even make it easier for you.