09 Aug Stuck in a debt cycle? What are my options?
Stuck in a debt cycle? What are my options?
First of all what is it?
A debt cycle is when you are running out of money and use debt to cover the difference, it could be every week, month or even year. The debt can be in the form of a credit card, personal loan, pay day loan or even from your mortgage. Debt cycles start because your expenses are higher than your income. As your debt grows it places further strain on your income which then places you further into debt. So the cycle continues and gets tougher each time until some changes are made.
Are you in a debt cycle?
The easiest way to identify if you’re in a debt cycle is looking at what your debt 3 months, 6 months, 1 year ago and even 5 years ago. Has it increased or decreased ? Was any of the debt used for investment purposes or for personal purchases such as cars and holidays ? If your debt is creeping up every month or year primarily due to lifestyle purchase ,such as car’s or holidays its a good sign your in a debt cycle. This is a very simplistic way of looking at it however it will give you a good starting point when assessing your situation.
So what are my options?
Depending on how deep in debt you are will determine which options are suitable. Below we have listed those options starting from least to most serious.
Find the cause, fix your budget and pay off your debts. This is the starting point and everyone in this situation needs to make a budget and find out where their money is going. We have a great article on starting a budget. No matter what step you’re at, this is always the starting point.
2) Debt consolidation
this means rolling all your debts into one loan. There are two key benefits to this option.
• It is easier to manage and budget, it’s the same amount every week/month which helps remove the stress.
• It may also reduce your minimum repayments freeing up some funds to use elsewhere and can stop the debt cycle.
It’s an extension of the first step and will work well provided you can work out an acceptable budget and stick to it. Be careful with this option as if your underlying spending doesn’t change you will be worse off and will still be in a debt cycle.
3) Informal debt agreement
An informal agreement is used when you’re struggling to pay your suppliers such as water, rates, gas, phone etc. You may have already stated to see impacts on your credit rating. It involves contacting the providers and explaining your situation to them. You need to arrange a payment plan that works for your creditors and enables you to continue living. This setup is dependent on providing a fair, consistent payment to creditors, remaining in contact and fixing the underlying issues. This may work well when there is a short term issues e.g. large unexpected bills or short term unemployment/injury. At this stage you could consider talking with a financial councillor to assist you in the development and implementation of the agreement.
4) Formal debt arrangement
This entails putting in force a legally binding debt agreement in the form of a part 9 or 10 agreement. This brings in the services of a lawyer and is lodged through the AFSA. This process starts to cost addition money to arrange and there is no guarantee that your creditors will approve your request and may continue to take action. If your request is approved your creditors can no longer take action against you and they have to stop contacting you. Provided you continue to make payments. A formal debt arrangement is an alternate to bankruptcy. It’s important to note this is still considered an act of bankruptcy and will have impacts on your credit rating. Debt agreements are registered on the National Personal Insolvency Index (NPII) for a minimum period of 5 years.
Bankruptcy is a serious action and has lasting consequences. For instance you will be registered on the National personal insolvency index (NPII) and it will remain permanently (it will revert to cleared once the term is completed). It also impacts your ability to be a director of a business, your ability to travel overseas for the extent of the bankruptcy period and places limits on income. You need to speak with your accountant or lawyer to understand the impacts and options available and consider them carefully.
The Australian financial security authority (AFSA) has some great information if you are considering options 3 – 5. I would encourage you to read their website and then contact specialists such as your accountant or lawyer.
These are the 5 main options you can use when you are starting to fall behind and are stuck. The trick is to try and identify when you are in a downward spiral which is quite hard to do.
Need help organising your budget or to get back on track contact us today on 1300 402 598