She's On The Money - Debt agreements, what are they, and when should we consider one?

Episode Date: November 23, 2021

A debt agreement is a formal way of settling a debt you can't service without going bankrupt, but when should we consider one? This episode discusses what to do when you can't pay back what you owe and the consequences you will face if you choose to go down that path. The advice shared on She’s on The Money is general in nature and does not consider your individual circumstances. She’s on The Money exists purely for educational purposes and should not be relied upon to make an investment or financial decision. Victoria Devine is an Authorised Representative of Australia Pacific Funds Management Proprietary Limited ABN 34 132 463 257 - AFSL 339151.See omnystudio.com/listener for privacy information.

She's on the money. She's on the money. Hello and welcome to She's on the Money, the podcast for millennials who want financial freedom. Debt agreements. What are they? What are their implications? And are they a good idea? My name is Georgia King and joining me to get to the bottom of it all is financial advisor, Victoria Devine V. Good day, m'lady. Hello. That felt really strange to say. I just took one of your terms and decided to try it. Do you say m'lady? Yeah. Thank you for doing a little nod to G's vernacular. I enjoyed it. Won't happen again. Really uncomfortable coming out of my

mouth, but thank you. Let's get on with the episode, George. I loved, I loved. V, what is a debt agreement? All right. So a debt agreement is exactly what it sounds like. It is a legally binding agreement that can actually help you settle your debts without having to go bankrupt, which is a good outcome if you have to consider bankruptcy, because as much as we've done an episode on bankruptcy before, it's not something that you do lightly. Like it would be a last option to get out of a sticky situation that you know you can't get out of in any other way. So it's really important to remember that there's not all that much that is sexy about bankruptcy. And I think that, you know, as the she's on the money person, I get a lot of DMs about it. And I

feel like there's still this misconception that it's just really easy. Like you just go bankrupt, like I've racked up all this debt, I'll just go bankrupt. Like, no, that is not the case. Please listen to that episode. So, a debt agreement is also not a debt consolidation agreement, which we've also spoken about on the podcast before, albeit it does sound similar. So, basically, G, with a debt agreement, you negotiate to pay a portion of your combined debt off over a period of time and you work with a debt agreement administrator, who is a legitimate person who will liaise between both you and your creditors you have to make sure that everybody's hunky-dory and really happy with the process and it works. But essentially, you do this when you

can't pay back the full debt. So, you need to come to an agreement and go, look, there's no way I'm paying that back. What can I pay back? What would be reasonable? Let's have a new agreement so that I pay you back. I don't have to go bankrupt and you actually get your money. Because often when somebody does go bankrupt, if they literally have nothing, that creditor is not going to win. Like they don't get anything. So, creditors are much more likely to want to enter into a debt agreement with you, even if it means they end up with less money because it's better than ending up with no money, G. Yeah. So, they still get some. Exactly. Sorry. You really threw me there when you said hunky-dory. I'm just trying to be more relatable, Georgia. Very hip. We loved it. So, how do you go

about arranging a debt agreement, V? So, the first place I would go is our friends at the National Debt Helpline. Again, not sponsored, just good eggs doing epic work. So, head on over there. If you don't want to go there and you want to do it yourself, you can go and have a chat with a registered debt agreement administrator. I guarantee our friends at the National Debt Helpline have a good recommendation though. And then they will work with you to submit your debt agreement proposal to the AFSA or technically known as the Australian Financial Security Authority. You can find a debt agreement officer if you want at the AFSA's website where they have a whole list of registered professionals in this space. So, there's lots of resources floating

around if you need help to arrange something like this. So, V, it sounds like debt agreements are a really good option for people who are feeling snowed under by multiple debts that they just can't pay back. How do you know if it's the right option for you? And if you like have enough debt, is it just a question or a matter of going to the national debt helpline and sorting it out? Or what would you recommend? Look, I would try to avoid these things. I won't say at all costs, but obviously we want to make sure that we understand our budget and our cashflow and what we're able to pay back. But I've actually sat down with people many, many times and calculated that they can't afford the debt that they've got. Like, and when I say can't afford, it's not

because they're prioritizing luxuries or they are in a situation where they're like, oh, I just don't want to do that because I've got other priorities. Like that's not the case. Sometimes I'll sit down with someone and I don't do this anymore. I do apologize because I just don't have the capacity, which is why I work now so closely with the National Debt Helpline to make sure that I can get people who are in these situations, the help they need from a free financial counselor. but I'd sit down with people and be like, what's your cashflow like? And they'd be like, okay, between us, we earn maybe seven grand. And I'd be like, okay, what's your debt look like? And they'd be like, oh, well at the moment we're just putting debt repayments on other credit cards

because we actually can't, our debt repayments are about six grand a month and they've got kids and they might be literally unable to meet those requirements. I'm not saying that everybody's situation is as dramatic as that. Like you could have a credit card that you genuinely don't feel like you can pay off. Entering a debt agreement is going to look different for everybody. It's not this one size fits all, like go and get this product. It's not a product. It is like a structure and a service that you would organize between you and the person you owe money to so that you don't have to go bankrupt. But essentially, if you feel like you need one, that is the time that you want to have a chat with a financial counselor, which is why I'm so pro chatting to the National Debt

helpline. I promise they're delightful humans and they'll set you up with a financial counselor to have a chat with. But if you feel like you need one, I would be doing a whole heap of research around what that looks like. This isn't an option for you if you're like, oh, well, I think I might want to consolidate my debts. Oh, it sounds good to negotiate it down. Like that's not the purpose. Like they will look into what you can afford and want a reasonable payout. They're not for people who just want to try and get out of paying debt off, if that makes sense, George, which I mean, we all would want to do if we were in it. Oh, gotcha. But that's not what they exist for. Are there then limits on how much you can

actually roll into these agreements, Bea? Look, not from what I understand. I mean, I have had people who have been refused debt agreements. In the past, I've had conversations with people and I'm like, I'm really sorry, they're just not willing to settle or they just don't want to enter into that or that won't work for your situation who have had to go down the route of bankruptcy. But if you can't get a debt agreement, I'm not saying that's okay. Cause I mean, it would be very stressful, but there are other options and that's why, and I mean, this just feels like an entire giant ad for our friends at the National Debt Helpline. You're welcome. I don't get paid by them, by the way, I never have been, but I would have a chat to a financial

counselor if that's the situation you were in, because I guarantee you they will help. Like, and there's no shame in reaching out to them. It doesn't matter if money is stressing you and you just feel overwhelmed and you can't afford advice, I would be talking to them like absolutely hands down. If I was in that situation, I would feel comfortable to call them. So gee, I don't think that there are limits on it, but people might not get one. So I've seen it before where it was just too much and it was just too complicated or there were too many creditors involved. Like I worked with one person that had more than 10 different credit cards that were all maxed out. And that's a really scary situation to be in. Like they were terrified and I'm so

grateful that I got to hold their hand and get them through that process. But yes, there is the risk that maybe someone doesn't want to go into an agreement because it is too high, but there's not an official limit per se. It very much comes down to the debt that you have and whether they are willing to enter into an agreement with you or not. And do they cover like all kinds of debts are only certain kinds? Oh, good question, G. They actually only cover some types of debts. So you can't go get a debt agreement for your HECS because that would not make sense. You also can't roll your court fines. So if you're going to court for being a little bit naughty, they're not going to let you roll those, but you can get a debt agreement for most unsecured debts. So like

credit cards or personal loans or bills that you haven't been able to pay or rent that you haven't been able to meet or an overdrawn bank account if that's the situation you found yourself in. But yes, there are some things that aren't able to be covered. You know, I've never been in the situation, but they're probably not going to pay your drug dealer off, you know, Jay? Oh, fair call, fair call. And I guess like they wouldn't cover like your house, your home on your mortgage because they would just seize it, right? Like you just sell it. You wouldn't be able to keep that. Yeah. So, with a secured asset. So, a secured asset means there's something there and that's the risk that you carry. It's why a personal loan sits at an average of a 14%

interest rate and a home loan at the moment is like 2%. It's because of the difference in risk. So, with a home loan, if you can't meet those repayments, it would be in your contract what happens. So, they might go, okay, if you miss repayments for this period of time, we'll actually put your house on the market and recover our costs. There might be some outstanding amount. So, say the property is valued at less or it is sold for less than what the mortgage you owe is, you might still end up in a situation where you're carrying a bit of debt that doesn't just disappear because they sell your house. So, there might be some reasons why you would still carry debt. But yes, if it's secured, usually they'll get rid of that asset

to recover as much of the cost as possible and go from there. mm-hmm and what are the consequences to this fee because you've kind of said that it's not something you would just go into lightly to kind of get rid of a few credit card debts like what are the consequences we're looking at here yeah so obviously the consequences are not nearly as significant as the consequences of going bankrupt which we've discussed on another episode but there are a few consequences that we absolutely should discuss if you're in business it is essential that you inform the people you do your business with that you're in a debt arrangement like legally you need to tell them and you might go okay I'm friends with all my clients I don't care

but that could actually impact your reputation or whether they want to work with you and like hypothetically what if I said that to my clients George like I'm a financial advisor I'm not in debt thankfully but like what if I was would that make them see me as maybe not a good financial advisor because I can't even manage that myself I think that there's a lot to work through there in addition to just having to tell people, like informing people of your situation, you might not even be comfortable with that. There's also the possibility that you might not be able to work. So there are certain professions like financial advice that you're not allowed to work as that profession if you're in that situation. And as mentioned before, not all

debts are covered in debt arrangements, but if you fall behind on the payment plan stipulated it in your agreement, then creditors do have the ability to repossess any assets you have if you've offered them a security for credit. So, it could end up with you losing stuff, even though the reason you've probably entered a debt agreement is so that you don't lose your stuff. Anyway, really important to be on top of that. It also means that you're probably not going to be able to easily access credit in the future and your details might appear, and I say might because this sometimes happens and sometimes doesn't on a credit reporting agency's records for five or more years. And your name will also appear on the national personal insolvency index and how long

exactly really depends on your situation. So it's one of those things where you're like, is this worth it? What does this mean for me? But a lot of people will be in a situation where it's like, I just need to get out of debt. This is good regardless of what's going on. And to be honest, one of the things that people who, you know, I've held their hand through getting debt agreements or like worked with or met, they're like, oh my gosh, Victoria, instead of having 10 credit cards or instead of, you know, maybe having a debt I can't pay back. You don't have to be that person who stereotypically has 10 credit cards to actually get a debt agreement. They go, a weight has been lifted off my shoulders instead of having, you know, a couple of things to pay off. And I

just never been able to keep track of it. I've just got one and it makes sense. And I've got somebody I can talk to and it really helps. Like this can be a really empowering thing, but it's also not something that you'd agree to if you can actually just pay it off and you're trying to get out of it early. If that makes sense, Jane. Yeah, exactly. So, it completely depends on your situation. Yeah. We will be back on the other side of this break to discuss the differences between bankruptcy, debt consolidation, and debt agreements, guys. So, please don't go anywhere. Okay, Vicky D, what happens if we've set up our plan with our debt agreement administrator and like we've been doing it for six months or so, but then we get in there and we just can't

keep up with the repayments. What happens then? Do we go bankrupt? No, not necessarily. There are options. There is always a light at the end of the tunnel, even if you can't see it right now. I promise. And it's really important that you remember that there's no such thing as completely lost, I promise. But there are a couple of options for you if you can't keep up with payments or if you no longer want to use the agreement and that's varying or terminating your agreement. Of course, you are going to need to talk to your debt agreement administrator and they're going to liaise with the creditors to sort everything out and have a chat about where you're at and what's going on. The most important thing in this situation is communication. And I mean, every

relationship is based on communication. But hot tip, hot relationship advice from G and V. But if you do choose G to terminate the agreement, then it's really important to think about the consequences. Like that creditor can apply to make you bankrupt and creditors can commence recovery for the payment of debts that you owe. So sometimes G, bankruptcy is not a choice. Some other people might decide, do you know what? No, I'm going to take her for all she's worth. and we actually need to send her bankrupt to get back what we need. Your contract will also automatically be terminated if you fail to make payments for six months after it's due or if you don't finish your payments within six months of the end of the agreement. So there are a couple

of things to take into consideration there. Again, as we said before, communication is the key here and a lot of people during COVID, we really need to stop talking about COVID on this podcast because it really triggers me and I'm sure I'm not the only one, but during COVID who kind of buried their heads in the sand and found themselves in a more sticky situation because they didn't talk to their debt agreement administrator. When in reality, if you had, they would have said, look, this situation is absolutely cooked. She can't pay them or we're going to stretch them out or we're going to put them on hold for a bit. Like there is always a way to work through this and it can be really hard and it can feel really overwhelming, but I promise, I promise, I promise

communicate and everything will be okay. Yeah, definitely. So, Bea, I want to talk to you about debt agreement versus bankruptcy versus debt consolidation. So, my understanding is that probably the first step would be debt consolidation. And then if things were a little more serious, you'd move into looking at a debt agreement. And then perhaps worst case scenario, you'd look at bankruptcy. Is that, do you have a money podcast? You on the money? Maybe I am on the money. You are. But does that sound right? Like, is that how we stagger our steps? Yes, it would be. So first things first, a debt consolidation doesn't mean you're in a sticky situation. It just means that you're going to consolidate a number of debts together.

So it might actually be something as simple as, hey, I have this car loan. It's at 15% and I have a mortgage and that's at two and a half percent. I'm going to talk to my home lender and consolidate those things together and put my car loan into my mortgage. Sometimes that's possible. Sometimes it's not, but that could be a good financial decision. Maybe you made that decision not because you're actually struggling to meet payments, but you're actually in a situation where you just wanted to save some money, which is a smart thing to do. And if you'd talk to a broker, I'm sure that they would take you through those steps and go, this is possible. This isn't possible, but it would put you in a better financial situation. The second thing is

consolidating debt because it is a little bit overwhelming and you've got a fair few debts here, there, and everywhere, and you just want one easy payment. In saying that, not every single debt consolidation will be accepted. It's obviously based on the risk and what credit you have access to and what you actually owe as to whether a bank is going to want to take that on or not. But again, you could consolidate it, meaning lower repayments potentially over a longer period of time, but one payment instead of multiple. But you also might do a debt consolidation if you really are in a pickle and can't afford it. And there are a number of different lenders that actually help you through that. So Good Shepherd actually is a really good example of a loan that

is a debt consolidation, but it's actually for people who have found themselves in a bit of a pickle. So they have an offering called the NILS loan, which is a no interest loan. And essentially you can borrow money so that you can pay it back without the interest. And they'll have a chat with you about what that actually means for you. So they have a whole heap of different things. They have loans for people experiencing family and domestic violence. They have loans for people who, you know, need financial assistance, loans for people who have recently found themselves single, loans for people who need a car and can't access one. Like they are just, obviously Good Shepherd makes them sound like good people because they are, but there are lots of different companies

who do this. Obviously Good Shepherd has never sponsored us, but they are just, again, good eggs doing good things. Someone who has sponsored us and partnered with the show though is Wiser, W-I-S-E-R, and they do debt consolidation loans. And they're not, they're not like a no interest loan scheme. They are just a good business doing good things. But the thing that I really like about them and learned about them in the process of working with them that has given me essentially mad respect for what they do is they really try to understand your personal situation and really try to go above and beyond and work out what that might look like for you and how that could work because they actually want to help and they actually want to do good things. So they would

be someone that I'm contacting as well. And then obviously the national debt helpline, which we've spoken about before. Of course, of course. So, that's debt consolidation V. We've then got your debt agreement. So, when things are getting a little more dicey, if you don't know what a debt agreement yet is, just like go back to the start of the podcast and did explain it. But sometimes it does take a few goes. Let's be honest. Sometimes I listen to things G. Like I listened to a lot of audio books. Honestly, not what I've said. Like I never remember what I said, but sometimes I listen to audio books and I get like three chapters in and then they're like, oh, Georgia did X, Y, Z. I'm like, who's Georgia? Like I've missed entire

pieces of audio. And I'm like, okay, I'm going to have to go back and start again. So I literally get it. But essentially a debt agreement is that next step. If you're not able to consolidate your loan for any reason, then that would be what you're considering. Again, talk to our friends at the National Debt Helpline. They will help you. And then when it comes to bankruptcy, that's obviously the more significant version of a debt agreement, which has a number of different consequences. Comparing the two, a debt agreement might actually be for you a more suitable alternative because it can benefit the creditors that you owe money to, as they might actually end up receiving more money than if you were to go bankrupt. They like a plan. I promise you that's

not a bad thing. You don't instantly have to jump to bankruptcy and it can provide a level of relief to you if you're not actually able to manage your debts. But there are some consequences which can affect you, which we've obviously already gone over to. But again, you'll have to work out if you're eligible for this because there are obviously going to be limits and the amount of debt and income you have to have to actually be eligible for this. Yeah, right. The last question for you today. So, on the whole, would you say that you would recommend someone who is struggling with multiple debts to consider taking part in a debt agreement if they've already considered the other options and, you know, maybe they've looked at debt consolidation and it's not going

to do the job for them? Look, I would, but again, I would be really wary because these are significant outcomes. It's not like, gee, go and get this loan. It's going to solve all your problems. Like that's not what a debt agreement is. Like this is a very serious thing to be taken very seriously. Like you're going to be on national registers. It's going to impact your credit score significantly. In saying that, if you are considering a debt agreement, I would, you know, take a stab in the dark and say that you probably don't have a good credit score to begin with, but long-term that will become something that is applicable. Like if you're in a situation where you're like, oh my gosh, I could just buckle down and pay this debt off really aggressively

over the next couple of years. And then there are no ramifications. Great. But once you've paid off that debt and you've done a debt agreement, it's actually going to be on your quote, like file for a fair few years after that, which is going to stop you from being able to buy a property or being able to do, you know, the things you want to do in life. And I'm not saying that that's the worst thing ever, because for some people, this is incredibly freeing. Like it puts them in a situation where they're back in control and there's nothing better than being in control of your finances. So if that was the case, absolutely. But a lot of people might just really have tunnel vision. They'll go, gee, I'm never going to be able to afford property. I'm never going to be

able to do this or that. And I don't need credit. And then they enter into a debt agreement for the next five years. And once your debt agreement finishes, you're going to be on the register for at least another five years. You're going to meet a partner. Maybe they have significant savings and then you're not able to get a home loan because of that. So I think that you need to remember like things can change significantly. And I'm not saying we need to be reliant on a partner to buy a property or do something in any way, shape or form, but a debt agreement is serious. I hope we're getting those vibes out there, but it is something I would want you to consider before considering bankruptcy. Like that is absolutely something. Is it going to work for

you? No. Okay. Now let's consider bankruptcy because these things, as much as they are dramatic, can be incredibly freeing. Like I can't tell you the amount of people who have been in so much debt. Like, you know, I'm not going to share too much about my clients, obviously, because the things I have told you guys thus far are really non-identifiable, but I remember talking to one person this was years ago and they were in more than $250,000 worth of credit card debt and this was you know pre-real commission so there was obviously a lot more leniency on lending and being able to access credit and they had bounced from one credit card to another credit card to another credit card and when I was like um how did this even happen like you shouldn't have got this

because of your credit report they're like oh you just don't tell them about the other credit cards And I was like, what? Like my mind was blown. But when you calculated that debt, because obviously it had such a high interest rate, we worked out it was going to take her 108 years paying the minimum repayments to get out of debt. And she couldn't even afford the minimum repayments. So we were definitely considering a debt agreement. But then when we worked out what that actually looked like, it wasn't going to work. So we went down the bankruptcy route. In saying that, that's a very dramatic example. It is not the norm. It is not what the normal people getting a debt agreement looks like. Often it can look like a mom and dad who have been

trying to get their kids through school, have gone through a lot of stuff through COVID, have, you know, got a mortgage, got a couple of personal loans, and maybe not stayed on top of their budget and cashflow who are considering this. So it's not, you know, always the most dramatic stories. It could actually just be a mom and dad trying to do their best. And this is a really great outcome for them because it stops them from losing their home. So, I just want to make sure that you guys know there's lots of different situations that are applicable to this, but if you are feeling overwhelmed with debt in any way, shape, or form, I would be sitting down going, okay, what does my budget look like? Doing a little bit of homework so you know what's

coming into your bank account, know what's going out of your bank account, and then if you're still like, look, I can't do this. National Debt Helpline, free financial counsellors. I promise you they've never paid me a dollar, but like, it sounds like they pay me a lot. Hey, they do get many a shout out. Okay. V, I do think that is all we have time for. I think it is. This has become a TED talk again. I loved it. I loved it as per. Look, I'm just really passionate about it. And debt is something that I think is so stigmatized. And often if you're, you know, considering this or it's been suggested by a financial counselor it can send you into a little bit of a spin because you'll feel oh my gosh I failed or I'm not good enough or I've done the

wrong thing or I've really messed up like you haven't I promise you debt is really hard and it's so easy to get into and it is not a reflection of who you are personally at all like anybody's money situation is not a reflection of who they are as a person like as long as you are kind and as long as you are nice to everybody that crosses your path. Like I think that that's all we ever care about or all I ever care about. But I think it's really important to remember that if you're going into a situation where you're considering bankruptcy or a debt agreement, that doesn't reflect on you badly. In fact, it takes a really strong person to realize the situation they're in and create a solution to get out of it. V, I'm going to sneak one last question in

just to end on a positive note. Yeah, go for it. What ended up happening with your client who did file for bankruptcy. Did it all work out okay? Oh, absolutely. I am not their advisor anymore. I don't have anything to do with them, which is a bit sad. But last time we left them, they were okay. They had filed for bankruptcy and they were going through the process. The thing that was most empowering about that was they filed for bankruptcy. They didn't wait until a bank sent them into bankruptcy. And that meant a few things. It meant that they were in control of the process and how it worked. They weren't forced out of their home at the last minute. They weren't having their door knocked down by creditors. It was a situation where

they could be more in control of a situation that was already out of control. So, I think it's really important to realize don't stick your head in the sand. You can save a portion of it or we found a way they did have to sell their home, but that was on their terms. They got to list it up for sale and pay back their debt instead of having it go through a bank and have the bank sell it, which more often than not will mean that you get a lower return for it because they just want to flog it off really quickly. Yeah, right. Okay. Hopefully that helps. No, that's great. That's good to hear. Alrighty, V. I think now it's actually, like that's actually, oh, we have time for now. Actually, really? No more questions, I promise. No more questions from Georgia. But as

always, just before we head off, we'd like to acknowledge and pay respect to Australia's aboriginal and torres strait islander peoples they're the traditional custodians of the lands the waterways and the skies all across australia we thank you for sharing and for caring for the land on which we are able to learn we pay our respects to elders past and present and we share our friendship and our kindness and remember guys that the advice shared on she's on the money is general in nature and does not consider your individual circumstances she's on the money exists purely for educational purposes and should not be relied upon to make an investment

or a financial decision. And we promise Victoria Devine is an authorised representative of Australia Pacific Funds Management, Proprietary Limited, ABN 34132463. No, I'm keeping it 257 AFSL 339151. But as I mentioned, G, as of 2022, we'll have some sexy new numbers to throw your way and hopefully you can remember them a little bit better.

Does that mean I don't have to say Proprietary Limited anymore? Oh, no, you'll still have to say Proprietary Limited. See you later, guys. Bye, guys.