Jones Partner

Getting into Debt is Easy. Getting out of Debt is Hard. What Should You Do?!

07/01/2019 by Bruce Gleeson

As we start the new year, I truly believe it is critical to allocate time to review where you are at and to reset / establish your financial and personal development action plan and goals for the upcoming year and beyond (a 2-year plan is good because it enables some bigger goals to be set). For those that haven’t got a plan, there is no better time to start. But don’t just make it a one-off, be disciplined and persistent with it. Your plan should be reviewed at regular intervals throughout the year to ensure that you are still on track to achieve your goals, and if you are not, then you can consider what you might need to alter to get there.

Financial and personal success (which can be measured in many ways) very rarely just happens. Rather, it happens through a planned, disciplined and persistent approach. After all, if it was that easy everyone would be doing it, right?! The reality is that attaining financial and personal development goals are achievable for many of us and we don’t all need to be financial whizz’s or life coaches to do it (and that is in no way meant to disrespect such professionals). Ultimately it comes down to your belief and attitude to achieve – there is little doubt that with basic changes a lot can be achieved over a 1-2 year period. But YOU have got to want to make that change.

As a Bankruptcy Trustee, I too often see the “debt trap” that individuals get caught in. Undeniably those without a plan to deal with this “debt trap”, don’t deal with the position as well as might otherwise be able to if there was an effective plan in place. With the availability of credit options to purchase goods immediately, payday lenders and a range of other funding options, it is easy to see how individuals can accumulate debt and later feel like they are in quicksand. Remember, getting into debt is easy, but getting out of debt is hard. Just ask anyone that has been through the process.

Ultimately voluntary bankruptcy is a way of dealing with accumulated debts that have got to a level that the individual is no longer able to manage. However, you shouldn’t be entering into voluntary bankruptcy just because you are struggling with debt – it should always be a last resort option and only taken after you have received professional advice (preferably from a qualified practitioner) so that you can make an informed decision. And no, the internet is not the best way to wholly make the decision. Whilst it is true that voluntary bankruptcy may well be the right option to proceed with, for example where an individual has been pursued regarding personal guarantees given for a significant amount regarding a failed business venture, it should not be the immediate default position without careful consideration.

My challenge to you, given we are at the start of the year, is:

• Do you already have a financial and personal development plan and goals written down? If so, that is fantastic – how did you do last year? Have you gone about re-setting it for this year? If you don’t have one, then why not have a go at setting one? It doesn’t need to be overly complicated. But try and break it down into 2 parts. I like to first set the goals I would like to achieve and then secondly, I work out the process (or things I need to do to achieve it) and thirdly, I then put a bit of a reality check over it to see that it is attainable with a little hard work. Remember, it shouldn’t be an easy walk in the park, but it should be a somewhat comfortable jog so that you can sustain it throughout the course of the year. Also try to build something into it so that if you achieved all your goals it is a little reward for your hard work. This could be done via the financial plan part whereby a small amount is set aside into a no-fee bank account where a regular amount is deposited.

But what if you are caught in a “debt trap” already? You might have to consider the plan [or establishing one], but you will probably need to be more aggressive about trying to rein in the debt. What I am referring to here is that there might need to be more urgent attention to start to get things back in order. I have outlined below some steps that I believe ought to be undertaken to work out what are possible ways to move forward.

Firstly, do not dwell on what has caused the present financial difficulties. Focus your energies on looking at the plan to deal with it. This is the case irrespective of whether the financial difficulties have been caused by business failure, loss of employment, significant health issues, excessive credit card spending, family breakdown or gambling (or a combination of the above).

Secondly, do not ignore correspondence or communications from your creditors. Whilst I can appreciate that continued communications from creditors can be overwhelming, un-communicative individuals from a creditors perspective quite often result in the creditor commencing their own recovery action which is likely to mean that you will start to lose control of being able to manage your financial position.

Thirdly, prepare a Cashflow Budget that realistically outlines on a weekly, fortnightly or monthly basis all forms of your income and all types of expenses. Yes, this means everything. Also prepare Statement of your Assets and Liabilities and be very realistic about asset values. Also ensure you list all liabilities, including mortgage, child support/maintenance [if applicable], credit card debt and tax debt.

Fourthly, what if there is no surplus cash from the Cashflow Budget to pay down existing debt? Then you might consider:

• Can you or your partner get any additional work (i.e. a side hustle) even if somewhat temporary to generate some additional income to use to negotiate a repayment arrangement / settlement with certain creditors, i.e. credit card providers?

• Is any form of debt consolidation possible? Basically, this involves combining various debts that have typically higher interest rates into 1 loan with a lower interest rate (i.e. if adequate security can be provided).

• Do you really need certain goods that are on finance contracts? For example, the new motor vehicle that is likely to be taking a big chunk of your disposable income. Evaluate the net equity position and work out if you can get a 2nd hand motor vehicle and free up some cash.

• Also consider what other types of expenses can be trimmed.

• If you have a mortgage, have you approached your mortgagee / lender and explained your position to them to better understand what options may be available to you insofar as hardship is concerned?

• Depending on the cause of your financial hardship, is there any possibility of getting an early release from your superannuation fund as part of a strategy to get your debts back under control? You should be able to find out this by contacting your superannuation fund.

• Are your taxes up to date and are you due any refunds? If you are due refunds and have outstanding returns, then it would be beneficial to lodge them.

The above steps are not meant to be absolutely comprehensive, but are intended to highlight areas that can be worked on as an overall strategy.

Even if you are caught in a “debt trap”, which might ultimately result in needing to declare voluntary bankruptcy, I believe there is still merit in establishing a financial and personal development plan which will aid in re-establishing yourself and rebuilding your financial position. So please don’t dismiss it, as this is easy to do. Be disciplined, persistent and stick with it.

Be wary of entering into informal agreements or agreements even under Part IX of the Bankruptcy Act [known as debt agreements] where repayment terms might exceed 3 years. The evidence available reveals that there is a much higher default rate when agreements exceed such term because individuals simply cannot see any “light at the end of the tunnel”.

Finally, do not be ashamed of your present position or think that you have failed in some way. There are many reasons why financial difficulty occurs. What is important is that you get the right advice about your financial position and your options. At Jones Partners we are regularly asked to review an individual’s financial position and advise on the best way for them to move forward.

STOP PRESS: in previous articles I have written about the 1-year Bankruptcy Legislation. It was thought by many commentators that the legislation would be passed this year and come into operation sometime in 2019. Unfortunately, the legislation still has not been passed and the present majority view it is unlikely to get passed before the calling of the Federal Election. Depending on the outcome of the Federal Election there is some uncertainty as to when it may be considered by Federal Parliament and as such it won’t be aligned with the legislative reform to Part IX debt agreements which is due to commence on 27 June 2019. If you would like to discuss either reform further, please do not hesitate to contact me.

by Bruce Gleeson