Comparing debt relief strategies – the pros and cons

When you find yourself in a situation where you are unable to pay your debts and financial stress is becoming a part of your life, you might wonder what the best course of action should be. Finding a way to overcome debt is not a one-size-fits-all solution, but the first and most important step is to seek expert assistance to assess your financial situation.

To help in the decision-making, consider the pros, cons, and suitability of 5 debt relief strategies: Informal debt agreements (Pay-In-One), Part IX debt agreements, debt consolidation loans, mortgage refinancing, and bankruptcy.

1. Pay-In-One (Informal debt agreement)

Strategic approach: Put the debts you choose into an agreement with your creditors, requesting a stop on interest and fees under their financial hardship obligations.

Pros

• You can choose to put the debts you want into this agreement – however, it is strongly recommended that you put all unsecured debts in so you have one payment for all these debts
• One affordable repayment for all the debts you include in your Pay-In-One – putting more $$s in your pocket each week
• No more hassles with these creditors or debt collectors
• No bankruptcy or default listing on your credit report
• We, as your administrator, negotiate with your creditors and manage the future communication and payments to your creditors
• Provides a clear plan to get you out of debt and back on track to a healthy financial future

Cons

• Other than under the creditor’s financial hardship obligations, this agreement is generally not legally binding on them – so if you miss agreed repayments, they may act quickly to terminate the agreement

Suitability

Our Pay-In-One program has been developed to assist a wider range of people than traditional options allow and to avoid some of the consequences that come with those other options. We have people who enter a Pay-In-One because they are suffering severe financial hardship, they do not want to deal with their creditors any longer, or they require it from a convenience perspective.

2. Part IX debt agreement

Strategic approach: Enter into a negotiated legal agreement with your creditors to repay your outstanding debt at a reduced rate you can afford.

Pros

• All debts combined into only one affordable regular repayment, tailored to your budget
• Ongoing interest on existing debts is frozen
• A negotiated reduction in the total debt amount owed, putting more $$s in your pocket each week
• No more hassles with creditors or debt collectors
• Enables you to keep certain trading licenses and assets (that may be lost in bankruptcy) and travel overseas
• An administrator negotiates with your creditors, manages all the paperwork as well as the debt agreement proposal and disperses your one regular repayment to all your creditors
• Provides a clear plan to get you out of debt and back on track to a healthy financial future

Cons

• It is legally binding, and bankruptcy can be enforced if you don’t fulfil your part of the agreement
• Some legal obligations may impact you depending on your work situation
• Secured debts and certain other types of debts cannot be included in the agreement
• It will be listed on your credit report for a minimum of 5 years
• There are some government (AFSA) fees and administrative fees (Safe Debt Management does not require upfront admin fees but instead includes them inside the debt agreement)

Suitability

Debt agreements are suitable for people with unmanageable unsecured debts i.e. people who are unable to pay their debts as they fall due. In addition, they must not have entered a previous debt agreement or been bankrupt in the last 10 years. There are also thresholds for assets, income, and total unsecured debts.

3. Debt consolidation loan

Strategic approach: Combine all your debts into one with a consolidated loan arranged on more favourable terms.

Pros

• Saves you money if the new loan has an overall lower interest rate
• May lower your repayments by extending the loan term
• Is easier to manage, with only one creditor and one regular loan repayment

Cons

• It doesn’t reduce or remove the debt
• It may increase the overall debt in the long term if the time frame extends beyond what it was
• Lenders often require a good credit history to consolidate debts into one new loan
• For higher loan amounts, lenders may require you to secure the loan with your assets – increasing your risk of loss if you fail to repay
• Securing the loan means you will be unable to include those debts in a debt agreement (if you decide to choose that as a future option)

Suitability

Suitable for people with a good credit history who need to rearrange their debts on more manageable terms with only one regular repayment amount.

4. Mortgage refinancing

Strategic approach: Utilise the equity in your home to refinance your current mortgage, consolidating both your home loan as well as your current outstanding debts.

Pros

• Easier to manage, with only one regular loan repayment payable to one creditor
• Generally, your overall interest rate is lower, saving you money

Cons

• It may take you longer to pay off your home loan
• It will reduce the equity in your home by adding other debts to your home loan
• Lenders often require a good credit history to refinance
• It will incur lender administrative fees and charges
• Without diligence, it’s easy to let those credit card debts you have cleared build up again

Suitability

Suitable for homeowners with equity in their home, a good credit history and means to repay, who need to rearrange their debts and finances on more manageable terms.

5. Bankruptcy

Strategic approach: Enter a legal process where you are declared ‘bankrupt’, i.e. you are unable to pay your debts and those debts are then cleared.

Pros

• Certain debts are immediately cleared
• It is a relatively quick process
• Creditors cannot pursue you
• A Trustee works with you and the creditors to ensure the fairest outcome for all

Cons 

• You may lose assets such as your house, property, and vehicles valued over a certain amount
• It may affect your income, employment, and business
• You may have to make compulsory payments if your income exceeds a set amount
• Most unsecured debts are covered in bankruptcy, but not all debts are included
• It may affect your ability to travel overseas
• Your name will appear on the National Personal Insolvency Index (NPII)
• It can affect your ability to obtain future credit
• For a full list of the consequences of bankruptcy, refer to the AFSA website

Suitability

Bankruptcy is usually considered the last option for individuals who are unable to repay their debts and do not qualify for a debt agreement. It is used when other debt-relief alternatives are not appropriate. A person can file for bankruptcy voluntarily, or a creditor can force a debtor into bankruptcy to sell their assets and recover the debt owed to them.

Which debt relief solution is best for you?

When it comes to getting on top of debt, the most important thing is to get started. Seek immediate help from a debt specialist like Safe Debt Management to evaluate your personal and financial situation and choose the debt relief solution that works best for you.

So, take that first step towards a debt-free future – make a safe choice and apply for a FREE no-obligation debt assessment today. What have you got to lose – but your debts!