Comparing debt relief strategies – the pros and cons
When you can no longer pay your debts and financial stress is becoming way too normal, what’s the best way out? Regrettably, when it comes to getting on top of debt, there’s not a one size fits all solution, however, the critical first step is to seek specialist help to evaluate your personal situation.
To help in the decision-making process, consider here the pros, the cons and the suitability of 4 debt relief strategies – debt agreements, debt consolidation loans, mortgage refinancing and bankruptcy.
1. Debt agreements
Strategic approach: Enter into a negotiated legal agreement with your creditors to repay your outstanding debt at a reduced rate you can afford.
- 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
- 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 do not require upfront admin fees but instead include them inside the debt agreement)
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 (ranging from $8,000 – $115,733 for Safe Debt Management). Read more about debt agreements here.
2. Debt consolidation loans
Strategic approach: Combine all your debts into one with a consolidated loan arranged on more favourable terms.
- 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
- 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)
- Suitable for people with a good credit history, who need to rearrange their debts on more manageable terms with only one regular repayment amount
3. 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.
- Easier to manage, with only one regular loan repayment payable to one creditor
- Generally your overall interest rate is lower, saving you money
- 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, to build up again
- 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.
Strategic approach: Enter into a legal process where you are declared ‘bankrupt’ i.e. you are unable to pay your debts and those debts are then cleared.
- 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
- You may lose assets such as your house, property, and vehicles valued over a certain amount
- You will be appointed a Trustee who will manage your bankruptcy
- 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 permanently appear on the National Personal Insolvency Index (NPII)
- It can affect your ability to obtain future credit
- For a full list of consequences for bankruptcy, refer to the AFSA website
Bankruptcy is normally a last resort for those who cannot repay their debts and who aren’t eligible for a debt agreement, and other debt relief options are not suitable. A person can declare themselves bankrupt. Or a creditor can force a debtor into bankruptcy to liquidate their assets and recover debt owed to them.
For another debt relief short term option also see our article on Financial Hardship.
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 arrange a FREE no-obligation debt assessment today. What have you got to lose – but your debts!