Informal debt agreements outside of the Insolvency Act

A new breed of "debt-help'' competitor is springing up, especially online, with names like nobankruptcy.com.au and mybudget.com.au, as well as minor start-ups such as creditplanb.com.au.

These services specialise in helping people overloaded with debt set a budget, negotiate affordable repayment plans with creditors and manage repayments – for a fee.

They are effectively creating informal debt agreements outside of the Insolvency Act.

Their customers, the people overloaded with debt, are not left with a lifelong black mark against their credit profile but may be without rights.

Fox Symes has dominated the debthelp industry for almost 10 years with its daytime television marketing strategy and slogan: "One thing saved me, a phone call to Fox Symes.'

In the past two years, Fox Symes has helped thousands of consumers repay $55 million to their creditors through a debt agreement registered under Part IX of the Bankruptcy Act.

The company administered 51per cent of all debt agreements registered with the Federal Government's Insolvency and Trustee Service (ITSA).

Fox Symes charges, on average, $100 per month in fees to collect one big repayment from the debtor and distribute it to creditors, who accept an average total repayment of 76 cents in the dollar of the debt owed.

That is expensive but that service comes with rights, said Fox Symes director Deborah Southon. "There are a number of operations negotiating de facto debt agreements with creditors but there is nothing there to bind creditors to the agreement,'' Ms Southon said. "A debt agreement is binding on creditors as well and provides debtors with certainty.

"Some people criticise formal debt agreements but they bind creditors as well to a deal and give debtors rights and let debtors move on.''

The marketing of Part IX debt agreements as pseudo debt consolidation instruments has been consistently criticised by consumer advocates and financial counsellors for years but they consistently deliver for creditors who have largely come to support them post-2007 reforms.

Nobankruptcy.com.au's Christian Oey said anybody could negotiate with their creditor if they were persistent enough. "You have to be patient and persistent and try to get to a person with authority over the computer,'' he said. "That's what we do and it can take time but it works.

"It is easier for us to do it for people. We know how things work.'' Mr Oey is a critic of formal Part IX debt agreements.

"There is no reason why heavily indebted consumers should sign a debt agreement. They are an act of bankruptcy that stays with you forever,” he said.

"Sometimes we have to be persistent and patient but we generally get to talk to decision makers at the creditors and do a deal that doesn't involve a debt agreement - that is good for everyone.

"Often people don't understand what the full consequences of a debt agreement are.''

Ms Southon said consumers should be aware that informal or de facto debt agreements do not prevent creditors from taking action in the future. "Informal debt agreements are a problem,'' Ms Southon said.

"A similar trend is emerging in the United Kingdom.

"There are some notorious small operators in this area.''

Formal debt agreements face another challenge from the government.

Changes to bankruptcy laws will add an up-front government fee to formal debt agreements from October 1.

The fee is expected to be $200 - plus an ongoing trailing commission on repayments of 1 per cent, which will be payable to the Federal Government's ITSA.

The debt help industry is already under pressure, and not just from economic stimulus payments and low interest rates.

There are only 14 registered debt agreement administrators left in Queensland.

There are 36 in Australia.

"The new fee will be problematic,'' Ms Southon said. "I wouldn't be surprised if the fee meets a lot of consumer resistance.

"What is ITSA going to do if a debtor refuses to pay the fee or can't pay the fee?

"These people can't pay their bills now.''

Good, bad and diabolical

Good, bad and diabolical
August 8, 2010 - SMH
There are different kinds of debt — but if you have the Very Bloody Bad variety, get rid of it.


YOU'VE probably heard about good debt and bad debt. Well, they should rightfully be called All Right Debt and Very Bloody Bad Debt.

The former is usually over assets that generate income and so earn tax deductions. It's "all right" because it potentially builds your wealth. VBBD, by contrast, actually drains your wealth potential.

Advertisement: Story continues belowWe're talking credit cards and personal loans. And yes, even your mortgage - although I'll get to why this is a special category.

With rates up - and probably headed higher yet - it's time to attack VBBD before it eats further into your future prosperity.

Credit cards and personal loans are the worst kind because they have the highest interest rates and are used for depreciating assets - in other words, those that will lose value over time. Or they are for experiences for which you'll have nothing to show afterwards, such as holidays.

Credit cards are priority No. 1. Not only are the rates typically the heftiest but the repayments also are often set so low you'll never pay them off.

A debt of $2000 on a card with a 17.65 per cent rate, a $59 annual fee that you add to the outstanding balance and a 1.5 per cent minimum repayment will in 25 years leave you with a debt of not $2000 but $3242. And you'll have paid almost $12,000 in interest.

Cannex calculates you'll still have debt in 25 years on cards with more than 16 per cent interest, a $24 annual fee and a minimum repayment of 2 per cent or less. This won't happen with a personal loan - repayments are set so you'll clear it in the agreed time. Such discipline can make them a better alternative.

The best way to eradicate credit card debt is to transfer your balance to a card that charges low or no interest for an introductory period and move heaven and earth to knock it off in that time. Don't use the card for any new spending - this is how the banks recoup their apparent generosity. Fresh debt will attract a high interest rate from day one and until you've cleared your entire transferred balance.

So what makes mortgages special VBBD? The fact they are over an asset, which is hopefully appreciating, so with any luck you'll end up paying out less by the end than your property is by then worth.

What's more, as with personal loans, the repayment schedule makes them a form of forced saving that can be a positive.

With - usually - lower rates than credit cards or personal loans, your home loan is the third debt to which you should turn your attention.

But remember that, as probably your biggest debt, your potential savings from early repayment are massive. Pay $100 extra a month on a $250,000, 25-year mortgage at 8 per cent and you'll save $53,000 (and more than three years); manage $500 and it jumps to $155,000 (and more than 10 years).

Beyond simply finding the cash, try these canny strategies.

Trick yourself into it by paying half your monthly repayments fortnightly. It sounds bizarre but because there are 12 months in a year but 26 rather than 24 fortnights, over the year you will make a whole extra - relatively painless - repayment.
Use every dollar twice by keeping and making savings into an offset account attached to the mortgage, so they are netted off your debt. You will save more in mortgage interest than you would make in a deposit account. And the fact that these are only "effective", rather than actual, earnings will mean no tax.
Get the bank to help by switching to a better deal. Even 0.5 percentage points will make a huge difference.

Use the rate rises as your incentive to bust out of debt far faster and a chunk cheaper.

Compass on Sunday Feb 21st - great show

Click on the headline/link above to watch this great show online again.

An Amazing Loan

Met a single mother today who has many credit cards and personal loans. The interest rate on one was 39.9%!!! Unbelieveable! She luckily only borrowed a small amount, but even so, she'll be paying interest forever!

That's the record rate for me.

At 40% a year, it means that every 2.5 years the debt doubles!

Some lenders have no conscience!

The things people do... on credit cards

Met another GFC victim today, paying off $45k Credit card debt, so not as bad as last week's meetings - two people with $150k each on cards!

I just don't understand how people can get that far into debt without doing something about it... or at least their accountant/financial adviser ringing the alarm bells.

This week's interest rate hike only means it will be getting worse... and more to follow next year... you can BANK on that!

Met another credit card devotee earlier this week, and he had signed up for a personal loan, (not with a bank though). He didn't read the fine print, which had interest of 34.95%!!!!!!

That's just daylight robbery!!!

No Bankruptcy - take the first step!

If you're strugging to make ends meet and things are looking financially desperate for you, consider appointing a debt manager like http://www.nobankruptcy.com.au/. They really do help people sort out their massive debts, and get their lives back on track.