Debbie & Alan asked us ‘How do we get a debt consolidation loan?’ We found a better option.
Unable to get a debt consolidation loan from the bank, Debbie and Alan were considering a Part IX debt agreement when they realised the consequences were not dissimilar to bankruptcy. We helped them find alternative debt solutions so they could pay their way out of debt instead. So if you’ve asked your bank ‘How do I get a debt consolidation loan?’ and they’ve turned you down, or you’re unsure if it’s right for you, keep reading.
What’s the deal with 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 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, non-public housing renters spend 20% of their gross household income on housing costs on average, compared with 16% for those with a mortgage. No wonder so many Australians are asking ‘How do I get a debt consolidation loan?’ in their quest to get out of debt.
When you don’t know what to do about debt collectors, what DO you do?
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.”
What do you do when the banks are 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, a strategy 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.”
What is a Part 9 Debt Agreement?
While googling ‘debt consolidation,’ Debbie and Alan came across alternative debt solutions, including Part IX Debt Agreements. Alan explains, “It looked like a Part IX Agreement was something that could help us, but we didn’t know 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 form ‘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).
You make this offer to your creditors in the form of a debt agreement proposal, based on an amount you can afford. There is also an AFSA lodgement fee. The consideration and voting period for creditors is usually 35 days. Should your creditors accept the debt agreement proposal, the debts no longer attract interest and the payments are consolidated into one, regular payment that is divided between creditors by the debt administrator.
Creditors are obliged to no longer pursue you for any debts included in the agreement, but there are exceptions. Some of these include debts incurred after the agreement started and joint debts. In the case of joint debts, creditors are able to try to recover debt from the person who is not in the agreement.
Although a formal debt agreement is considered an alternative to bankruptcy, it’s important to understand that it comes with similar consequences. People who enter into a debt agreement have their names recorded on the National Personal Insolvency Index (NPII) and the agreement appears on their credit file for up to five years. In some instances, a debt agreement may expose applicants to the possibility of being forced into bankruptcy by their creditors against their will.
This is why Alan and Debbie decided to explore alternative debt solutions.
What other alternative debt solutions are available?
After talking with a free financial counsellor and a number of debt agreement companies, Debbie and Alan decided to get a second opinion from MyBudget about alternative debt solutions. MyBudget is uniquely positioned to help people explore their situation from all angles because the focus is on creating a detailed budget 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 finance expert 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 – everything.”
Informal debt negotiation may be an alternative
Debbie and Alan were pleasantly surprised when MyBudget was able to help design an affordable budget that allowed them to avoid any further late fees and charges, without going into a debt agreement. Instead, their budget showed that they would be able to pay their way out of debt.
This approach is called ‘informal debt negotiation.’ Rather than entering into a formal debt agreement, MyBudget negotiated directly with Debbie and Alan’s creditors to set up affordable payment arrangements until they got back on their feet. Debbie and Alan hadn’t known what to do about debt collectors, but MyBudget had a solution.
As well as dealing with Debbie and Alan’s creditors, the stress of paying bills was taken away by MyBudget because all of their payments were 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.”
If you’ve been asking ‘How do I get a debt consolidation loan?’ or are considering a Part 9 debt agreement, it’s important to get a tailored debt solution
In some circumstances, a Part IX debt agreement is a solution for reducing the cost and stress of debt. In Debbie and Alan’s case, they were able to get back on their feet using their existing income and without needing a loan.
What’s more, the sense of relief was almost instant.
“The weight was lifted,” says Debbie. We walked out of the [MyBudget] office smiling. We had ideas about what we could do in the future. It was wonderful.”
Not sure what to do about debt collectors? Relationship under pressure from debt stress? Talk with a MyBudget money expert for free and explore your options, including alternative debt solutions.
To book your free budget consultation, call MyBudget on 1300 300 922 or enquire online. You can read more MyBudget client success stories on our website, or learn more about debt consolidation and bankruptcy:
This content has been updated from the original post published in December, 2019.