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With so many Australian’s facing redundancy due to the Global Economic Crisis and household debt at record highs, CHOICE – Australia’s largest and most respected consumer organisation, investigated the options available to Australian’s seeking debt relief in 2009. Australian Women Online is among a small number of websites selected to provide our readers with a first look at the CHOICE report ahead of it’s official release this Thursday, 23 April.
CHOICE’s shadow shop found debt relief companies such as Fox Symes, mainly recommended expensive debt agreements which will damage a consumer’s credit history. CHOICE also found that none of the 11 debt relief companies investigated had recommended free and independent financial counselling services.
CHOICE says debt relief companies offer to help consumers to enter a debt agreement and then act as administrators of the agreement. They also offer bankruptcy and other debt relief services. However, unlike most financial counsellors, debt relief companies charge fees for their services.
To find out exactly what these companies offered consumers, CHOICE engaged to shadow shoppers to phone 11 debt relief companies including the largest of them all, Fox Symes.
“Both shadow shoppers claimed identical profiles, with only their debt level differing. They stated an annual before-tax income of $40,000. Both were single with no dependants, lived in a two-bedroom apartment in Sydney’s outer suburbs and had missed their last three loan repayments. Apart from their cars, some superannuation and normal household goods, they had no savings or substantial assets.”
“Michelle” owed $12,000 on two credit cards. She recently had a car accident and used her credit cards to pay $3000 in repairs for which she hadn’t budgeted. She owned a car worth about $6000.
“Elaine” owed $40,000. She had four credit cards with a combined debt of $28,000 and a secured car loan of $12,000. She was unemployed for three months but has since found employment. Her car was worth $8000.
CHOICE found that the majority of debt relief companies offered their shadow shoppers a debt agreement. Whilst most offered other options such as, calling the lender, applying for a hardship variation, refinancing or bankruptcy – none of the companies advised the shadow shoppers to seek help from a free and independent financial counselling service.
“Typically, a consultant asked the shadow shoppers for their debt, income and other details about their situation and then outlined the options. In one case, a debt agreement company asked Elaine to completely submit her financial affairs; she was told once an agreement was made her pay would go into the company’s trust account and it would send her money to live on and pay her bills, debt repayments and fees. If the company sent her less money than she needed to live on, this would have been a very dangerous option.”
In regards to the fees charged by these debt relief companies, CHOICE found: “Some companies quoted a set-up fee only and didn’t provide information on ongoing fees, saying that these were included in the repayment amount. Quotes ranged from up to $2000 for Michelle’s $12,000 debt, and $6000 for Elaine’s $28,000 debt (her car loan was not included in the agreement).”
Based on their investigation of debt relief companies, CHOICE concluded: “Debt agreements are no silver bullet; they’re expensive and will damage your credit history. Think carefully and exhaust all other options before taking such a drastic step.”
CHOICE also asked Richard Brading, Principal Solicitor of Wesley Community Legal Service in Sydney, to outline options for both of their shadow shoppers:
For Michelle, “a debt agreement is not an attractive option due to the high costs. As there are only two creditors (for her credit cards), she could try negotiating a reduction in repayments for a short period and possibly a reduction in the interest rate. Alternatively, she could consolidate the two credit cards into a personal loan at a lower rate. With any repayment plan she would need to set aside some money for any future unexpected expenses. She could sell her car and use the proceeds to pay back part of the debt. She could also consider renting out the second bedroom in her apartment or taking a second job.”
For Elaine, “the burden of paying off a debt agreement over five years would be very heavy and any unexpected setback, such as a temporary period of unemployment, would cause the arrangement to fail. The alternative is bankruptcy, which would give her a fresh start. On her current income she wouldn’t have to make any contributions to the debt. While her lender could repossess her car, they’d usually allow her to keep it so long as she kept up with the loan repayments.”
Mr Brading added: “To avoid bankruptcy, Elaine could apply for a hardship variation because she was unemployed for three months. She could also argue “maladministration”, which means she has been lent more money than she can reasonably afford to repay. If her lenders didn’t grant her hardship application and refused to reduce the debt because of maladministration she could complain to the ombudsman.”
So what should you do when facing mounting debts? CHOICE recommends the following first steps to reducing your debt:
- Make a budget: Consider options to reduce your living expenses, such as selling the second car, as well as ways to increase your income, such as asking any adult children who still live with you to contribute to household expenses. Use the Online Budget Planner developed by CHOICE.
- Research ways to cut back on expenses; talk to family and friends and for useful websites, see Debt Relief Contacts.
- Get ahead Once you’ve freed up some cash, make extra repayments, which can slash thousands of dollars in interest off your mortgage and credit card(s).
The official report will be released on Thursday, 23 April 2009. For more information about debt relief visit the CHOICE website http://www.choice.com.au/viewArticle.aspx?id=106816
Photo Credit: Linda Macpherson – Fotolia.com