Digging your way out of the big hole
You’re never in debt so deep that you can’t get out again. At least one reader of this column will be reassured by this message from Raewyn Fox, chief exec of the Federation of Family Budgeting Services.
In a recent column, I wrote about summary instalment orders (SIOs) — court orders that enable people with less than $12,000 of unsecured debt to repay it in manageable amounts over three years, effectively at a lower interest rate. SIOs give people a second chance.
That brought the following response from a reader: “Mary, is there any help for me? I have more than $12,000 debt so would not apply for the SIO programme. I am desperate to get out of my credit card debt and a personal loan debt. Can you help?”
Yes — if you really want to be helped.
Let’s start with the good news. The $12,000 SIO limit is soon to be raised to $40,000, and the three-year repayment period will sometimes be extended to five years. The changes are expected to take effect some time this year.
Note, too, that under an SIO, you may not have to pay back your full debt. It all depends on your circumstances, says Fox.
In the meantime, you can get free help from Budget Advice Services, which are listed in the White Pages.
One of the first things they do is ask your creditors — the people you owe — for two or three weeks’ grace, during which you and your adviser can work on a reasonable repayment plan.
“We start by looking at the big picture — where the debts lie in relation to what someone owns and their repayment ability,” says Fox.
For example, you may be able to repay high-interest debt by adding to your mortgage, which can hugely cut annual interest payments.
For example: On a $10,000 three-year loan at 20 per cent with monthly payments, you will pay about $3,400 in interest. On that same three-year loan at 8 per cent, you will pay about $1,300 in interest — about a third as much.
The only worry is that you won’t repay the $10,000 over three years, but will simply add it to your long-term mortgage.
If you repay it over the life of a 25-year mortgage, you will pay almost $11,000 in interest. It’s important to be disciplined about repaying the extra mortgage quickly.
Another option, if you have a good credit rating with a bank, is a personal loan at lower interest than you are currently paying, says Fox. But, she notes, “the bank will be checking to make sure you’re being realistic about how much you can repay.”
If you can’t get a cheaper loan, Fox encourages negotiation with your creditors. “In the long term, all they want is their money back. If you have a change in circumstances, tell them that you need to negotiate a longer repayment term. They are generally willing to negotiate.”
One big advantage of Budget Advice Services is that they will do the negotiations for you. And because you are seeing them, creditors know you are serious about your problems, and that your adviser will come up with a workable repayment plan. Sometimes creditors will forgive part of the debt or reduce the interest rate or offer interest payment holidays.
More broadly, a budget adviser will help you to work out your priorities and set goals. The emphasis is on looking forward, rather than dwelling on what has happened. “It’s not about blame” says Fox.
For more information, see www.familybudgeting.org.nz. The website is in the process of being updated.
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.