Help for those in debt
Repaying high-interest debt is sometimes called the best investment. And there’s a way to do it that, I suspect, many people don’t know about.
When you repay a loan, that improves your financial situation as much as an investment that pays the same interest rate as the loan. Getting rid of something that costs you money is as good as acquiring something that gives you money.
For example, if you repay a credit card that charges 20 per cent interest, that’s equivalent to earning a steady 20 per cent on an investment. And it’s risk-free. It doesn’t come better than that!
Repaying debt also makes you more secure. It’s much easier to borrow emergency money if you don’t already have a mountain of debt.
With credit card providers pushing cardholders to borrow more, and stores offering heaps of “buy now, pay later” deals, many New Zealanders are sitting on large debts.
The thousands of dollars they spend on interest over the years could instead be spent on fun, a house, retirement savings…. Anything is better than lining the pockets of financial institutions.
What’s more, many are being threatened with penalties or legal action because they are not meeting minimum repayments.
If you want to get rid of high-interest debt, one way is to apply for a summary instalment order (SIO). It’s not painless, but it can work well.
With an SIO, you effectively reduce your interest payments, and set up a repayment programme that you should be able to live with.
To be eligible, your total unsecured debt must be less than $12,000. Unsecured debt is debt that isn’t guaranteed by someone else or secured by an asset, such as a house.
It costs $12 to apply — a wonderfully small amount.
A district court judge makes a court order that allows you to repay your debt in instalments over up to three years. During that time, creditors — the people you owe — can’t take legal action against you.
In your application, you give information about: what you own; how much you earn; everyone you owe and how much and what for, and how much you think you can pay back each week.
The judge ensures you will still have enough money for normal living expenses before deciding on your weekly repayments.
She or he will then appoint a supervisor to help you manage your payments and distribute the money to your creditors.
“If you are sick or you have been laid off work, for example, and you know you cannot make the payments required, contact your supervisor or the district court immediately”, says a Ministry of Justice brochure.
“Unless you can show that you are short of money for a good reason, your supervisor will assume you are refusing to make payments and may notify your creditors.” At that point, the creditors may start legal action against you.
The supervisor may charge you a fee of $100 or 7.5 per cent of the money you owe, whichever is greater.
That’s why I said SIOs “effectively” reduce your interest payments. In fact, interest payments stop, but that is somewhat offset by the supervisor’s fee. Still, the fee will always be lower than the interest you were paying.
While the SIO is in force, you won’t be able to obtain credit of $100 or more, unless you can prove that the creditor knew about the SIO.
That probably means the end of credit cards for a while. But three years without a card might be the best thing for you.
By the way, a creditor can also apply for an SIO to recover money from a debtor.
For more information, ask at your local Budget Advisory Service, Citizen’s Advice Bureau or district court.
Mary Holm is a freelance journalist, a director of Financial Services Complaints Ltd (FSCL), a seminar presenter and a bestselling author on personal finance. From 2011 to 2019 she was a founding director of the Financial Markets Authority. Her opinions are personal, and do not reflect the position of any organisation in which she holds office. Mary’s advice is of a general nature, and she is not responsible for any loss that any reader may suffer from following it.