Unable to get a debt consolidation loan from the bank, Debbie and Alan were looking at a Part IX debt agreement when they realised they might be able to pay their way out of debt instead. In this article, we take a closer look at debt consolidation and debt agreements and other strategies to get out of debt.
Australia’s debt situation
Australians are among the most personally indebted people in the world. Our household debt-to-income ratio (how much people owe compared to how much people earn in a year) is just short of 200%, a figure that has trebled since the 1990s. The only country with more household debt than us is Switzerland.
In less than 20 years, the average Australian mortgage balance has grown from $160,000 to $350,000. Renters are feeling the pressure too. According to this housing affordability report, on average, non-public housing renters spend 20% of their gross household income on housing costs, compared with 16% for those with a mortgage.
“It got to the point that we were scared of answering the phone.”
All of this debt adds up to a mountain of potential stress. When a household budget is already stretched, all it takes is an unexpected bill or even a small drop in income to break the bank. Over time, this is how savings get eroded, then credit card debt builds up, and suddenly the household is existing week-to-week.
Brisbane couple Debbie and Alan were in exactly that position. A series of events led to snowballing debt. They were racking up late fees and charges, and had the added stress of debt collectors chasing them. “It got to the point that we were scared of answering the phone, knowing that there could be someone at the other end wanting money from us,” says Alan. “Stress was causing a lot of anxiety in the household. It wasn’t a fun time at all.”
“Banks were no help.”
The obvious place to turn for help was their bank. Debbie and Alan wanted to pay back the money they owed by consolidating their credit card balances into their mortgage. This is called ‘debt consolidation’ or ‘mortgage refinancing.’
The aim of a debt consolidation loan is to roll multiple debts into a single loan that has a lower interest rate and lower repayment figure. As well as saving money and easing cash flow, having one loan with one repayment can be easier to manage.
One of the limitations of debt consolidation is that lenders usually require a property to be used for security. A real estate asset reduces the lender’s risk of losing money should the borrower stop making repayments.
Debbie and Alan spoke to a number of lenders about refinancing their home, but with bills and overdue payments stacking up, none of them were willing to help. Alan explains, “We’d tried talking to the banks about debt consolidation loans, but no one was coming forward with any assistance.”
Part IX Debt Agreement—what’s that?
While they were googling ‘debt consolidation,’ Debbie and Alan came across another type of debt solution, a Part IX Debt Agreement. Alan explains, “More than likely, it looked like a Part IX Agreement was something that could help us, but without knowing exactly what a ‘Part Nine’ was.”
Personal insolvency agreements (PIAs) and formal debt agreements, also known as Part IX debt agreements, are so-called because they are ‘Part IX’ of the Bankruptcy Act. Formal debt agreements are administered by licensed debt agreement administrators who, in turn, are regulated by the Australian Financial Security Authority (AFSA). MyBudget’s sister company MyDebtSolution is a Registered Debt Agreement Administrator.
As an alternative to bankruptcy, a Part IX Debt Agreement is an opportunity to negotiate a reduced sum payable to your creditors in instalments over a set period of time. Should the creditors accept the proposal, the debts no longer attract interest and the payments are consolidated into a single, easier to manage repayment for a fixed time, usually up to five years.
Although a formal debt agreement is considered an alternative to bankruptcy, it’s important to understand that it falls under the same laws and therefore comes with similar consequences. In some instances, applicants also face the possibility of being forced into bankruptcy by their creditors against their will.
Alan and Debbie decided to explore their options.
But first, a detailed money plan
After talking with a number of debt agreement companies, Debbie and Alan approached MyBudget for a second opinion. MyBudget is uniquely positioned to help people explore their situation from all angles because the focus is on creating a detailed financial picture before choosing a solution, such as bankruptcy or a debt agreement.
The first step was to help Alan and Debbie create a customised household budget for the next 12 months. This detailed money plan included all of their income, debts, bills and living expenses, and mapped a path to their financial goals.
MyBudget founder and director Tammy Barton explains, “Before you can help someone select the right debt strategy, you need to have a detailed understanding of their financial situation. Not just how much they owe and their loan repayments, but a complete picture of all their incomings and outgoings. That includes often overlooked expenses, like Christmas and birthday presents and vet bills and unpaid time off—everything.”
Informal debt negotiation
Debbie and Alan were pleasantly surprised. MyBudget was able to help them design an affordable budget that allowed them to avoid any further late fees and charges while they paid their way out of debt.
It’s called ‘informal debt negotiation.’ Instead of entering into a formal debt agreement, MyBudget negotiated informally with Debbie and Alan’s creditors to set up affordable payment arrangements that helped them get back on their feet.
The stress of paying bills was taken away because the couple’s payments were made directly from their budget. Alan adds, “One of the best things MyBudget has done is handling all of our creditors on our behalf. So now we’re not scared of the phone ringing. MyBudget has taken our financial wellbeing into their hands and we now have savings we can work with. They’ve really done wonders for us as a family.”
Could you pay your way out of debt, too?
In some circumstances, a Part IX debt agreement is a good method for reducing the cost and stress of debt. But in Debbie and Alan’s case, they were able to get back on their feet using their existing income and without needing a loan.
The sense of relief was almost instant. Debbie says, “The weight was lifted. We walked out of the [MyBudget] office smiling. We had ideas about what we could do in the future. It was wonderful.”
And in a few short years, Debbie and Alan were not only back on track, they had savings set aside for family holidays and were totally free of the debt that had been causing so much stress and worry.
To book your free budget consultation, call MyBudget on 1300 300 922 or enquire online to find out how we can help you achieve your financial goals.
Read MyBudget client stories on our website or learn more about debt consolidation and bankruptcy: