Factsheet: Can't pay your debts?
ONLINE TEXT VERSION - April 2011
Are your debts getting out of control? Maybe
you're struggling to make ends meet because of unemployment, ill
health, economic conditions or a relationship breakdown.
Perhaps this is the first time you've run into trouble with your
finances. You might not know what to do if you can't pay your bills
or meet your repayments, or where to go for help.
Whatever your situation, it's important to act quickly. There is
It's a juggling act for Steve and Nicky
Steve and Nicky have two children, aged two and five. Recently
Steve's carpentry business has been slow and the family's income
has dropped. For the first time in their lives, Steve and Nicky
find themselves with no available cash and have to juggle credit
cards to pay their bills. They've reached the limit on three out of
their four credit cards and are using the fourth card to make
minimum monthly repayments on the other cards, repayments on their
home loan and to pay bills. Steve is confident that business will
pick up. In the meantime, they're contacting their credit providers
to ask if they can reduce repayments on their credit cards for a
short time. They plan to try and keep up with home loan repayments
because their mortgage is their most important loan.
TIP: Avoid doing nothing
Talk with your credit provider
- If you can't keep up with repayments on a credit card or loan
(including a home loan), talk with your credit provider as
soon as possible and let them know you are experiencing
- If you can't come to an agreement with your credit provider,
ask them to review their decision if you think it's unfair. If
you're still not happy, you can complain to the Australian
Financial Complaints Authority (AFCA).
Apply for a hardship variation
- If you want to repay your debts but can't, and you haven't been
able to negotiate an arrangement with your credit provider, you
have a legal right to seek a hardship variation.
This is a formal process where you ask your credit provider to vary
the terms of your loan contract.
- Without any change being made to your current interest rate,
you can ask your provider to extend your loan period, so that you
make smaller repayments over a longer period of time, OR postpone
your repayments for an agreed period, OR extend your loan period
AND postpone your repayments for an agreed period.
- After you apply for a hardship variation, the credit provider
must respond to your request in writing within 21 days.
- If your credit provider refuses your hardship application, it
must give reasons. If you think the reasons provided are unfair, you can
complain to an independent dispute resolution scheme, such as
Prioritise your debts
- Not all debts are created equal! Prioritise secured
debts like your home and car loan over ongoing payments on
unsecured debts like credit cards, so you don't risk making
yourself and others more exposed.
- If all of your unsecured debt (for example, debts incurred on
credit cards and store cards) is turned into a secured debt over
the family home, then you've created some extra risk that your home
could be on the line if things go wrong.
- If your home is owned with someone else, they will also be 100%
liable for any new loan that's secured over the whole property.
Similarly, if you have to ask someone to be a guarantor for your
new loan, you'll be exposing them to financial risk.
Dealing with multiple credit card debts
While it makes sense to pay off the debt with the highest
interest rate first, if you're having trouble managing several
debts - for example, you're struggling to meet even minimum
repayments on multiple credit cards - here are two payment options
you could consider:
- Continue making minimum payments on all cards, while aiming to
clear the card with the smallest debt first.
- Then work your way up to the next smallest debt. This way you
will reduce the risk of incurring multiple charges for late or
missed payments, save on annual fees and be in a position to direct
this money to clearing your other debts.
- You'll also be encouraged by having managed to clear a debt.
This can be very motivating if you feel like your debts have become
out of control
- Continue making minimum payments on all cards.
- Pay off the credit card with the highest interest
rate first and then keep working your way through your
cards. This may have the advantage of saving money you're paying in
Whatever option you choose, stop using all but one of
your credit cards (the one you want to end up with at the
end). Try to use it only for emergencies.
As you clear each card, cut them up and close the account. This
is important because, if you don't close the account, you may still
have to pay fees on an account you don't use.
Lower the limit on the last remaining credit card to an amount
that is manageable to repay within three months - say, $2000.
TIP: Don't borrow to pay bills
If you are having trouble paying a water, phone, gas or
electricity bill, contact your water, phone or energy company. Most
companies have hardship officers who can help you work out a plan
to pay the bill in instalments. If the provider
won't help you, you can complain to one of the ombudsman
What about refinancing?
If you have a problem managing your repayments, it can sound
like a good idea to roll all of your loans into one - for example,
using a personal loan or home loan.
Consolidating or refinancing your
loans can work for some people if it means they will be paying less
in fees and interest. For others, it may be only a short-term fix,
especially if you can't meet the repayments on your new loan.
There will often be extra fees and charges to pay as well, and
some people end up paying more interest on their new loan. Even if
the interest rate is lower on the new loan, paying a short-term
debt (like a credit card or personal loan) over a very long term
(such as with a 25-year home loan) means you will still pay more in
interest and fees in the long run.
Another thing to consider is that consolidation may allow you to
borrow even more money. For example, if your existing credit card
balances are transferred onto your home loan, as part of the debt
consolidation, you might be tempted to put new debt onto your
credit cards. Or, if you get a line of credit, your borrowing limit
may be more than your current debts. If you use the consolidation
loan simply to increase your overall level of debt, you'll probably
make your financial problems even worse.
Beware predatory brokers and credit providers
Avoid brokers who make unrealistic
promises about getting you out of debt or who use
advertisements claiming they can help no matter how desperate your
financial situation is. Anyone who asks you to sign blank
documents, refuses to discuss repayments, rushes the transaction,
or won't put all loan costs and the interest rate in writing before
you sign up, is not to be trusted.
Equity is the proportion of your property that
you own outright. If there is no mortgage outstanding on a property
in your name, you own 100% of the equity. If you sold the property,
all the sale proceeds would belong to you.
For example, if you owe $100,000 on your mortgage and your home
is worth $200,000, you own 50% of the equity. If you sold the
property, half the sale proceeds ($100,000) would belong to you and
half would go to repay your mortgage.
Equity stripping is when someone takes
advantage of borrowers in difficulty and exploits their desire to
save their home by:
- charging high fees, sometimes more than 20% of the equity in
- arranging for a refinancing arrangement where it is extremely
unlikely the borrower will be able to afford the new
Be realistic about whether you can afford repayments under a new
refinancing arrangement if you are already under financial stress.
You may need to consider making the tough decision to sell your
home or downsize rather than tapping into your equity in an attempt
to keep your home.
If you do refinance but can't afford the new repayments, you may
end up being forced to sell anyway - and there will be less equity
left to repay your debts and make a new start.
Six steps to smarter borrowing
Work out if you can afford to borrow
- Before you borrow money or consider refinancing, use our budget planner
to see exactly where you spend your money and how much you can
afford in repayments.
- Allow for interest rate rises and anything that might affect
your future income (such as changing jobs).
Shop around for the best deal
- Before you take out a new loan, take time to compare interest
rates, product features and fees and charges and how these stack up
against your existing loan. Even a small difference in the interest
rate can make a big difference to what you have to pay.
- Shop around online to compare products or use our personal loan
- Research published by the independent consumer group CHOICE
can also help you find the right product for your particular needs
Know who and what you're dealing with
- Anyone who wants to engage in credit activities (including
brokers) must be licensed with ASIC, or be
an authorised representative of someone who is licensed. If they
aren't, they are operating illegally.
- There is currently an exemption from licensing for credit
assistance provided through some businesses (for example, retail
stores and car yards). While the store may be exempt, the actual
credit provider must still be licensed. If you are unsure who the
credit provider is, ask the person you are dealing with to point
out the name in your credit contract.
- To find out if a credit provider is licensed, visit our Consumer credit regulation
page or call ASIC's Infoline on 1300 300 630.
- Anyone engaging in credit activities (for example, by providing
credit or assistance to you) must give you either a credit
guide (with information such as their licence number, fees
and details of your right to complain) or a written notice with
details of how to complain about their activities.
Keep up with your repayments
- If you can't keep up with repayments on a credit card or loan
(including a home loan), talk with your credit provider as soon as
- Don't forget to tell your credit provider that you are in
financial hardship and why.
- Many credit providers will try to help you if you can't make
repayments because of illness, unemployment or other financial
difficulties. It's important to contact them as soon as you can.
They will assess your situation and work out with you what kind of
help is available, depending upon how long you are likely to have
difficulty making repayments.
- Remember to only make repayment arrangements you can
afford. There is no point in agreeing to pay an amount if
you don't have the money to do so.
- If you have come to a new agreement with your credit provider,
make sure you stick to the new repayment arrangements. If you
can't, keep paying as much as you can afford, even if it is not as
much as the credit provider is asking for. Don't stop paying
because that will only make it harder for you in the long
Get help if you can't pay your debts
- Get help from a financial counsellor or
community legal service to discuss your
- Financial counselling is a free service offered by community
organisations, community legal centres and some government
agencies. A financial counsellor can help you get a clear picture
of your situation, provide information about your options and work
out a budget. Visit the Financial
Counselling Australia website to find a financial counsellor,
or call the National Debt Helpline on 1800
007 007 during business hours.
- Free legal advice is also available from
community legal centres and Legal Aid offices.They can help you
with credit disputes and debt recovery through the courts.
- For confidential telephone crisis support services, call
Lifeline on 13 11 14 (available 24 hours a day) or try their crisis support chat service.
Complain if things go wrong
- Try to resolve your problem with your credit provider
- If you aren't satisfied, take your complaint to your provider's
independent dispute resolution
scheme, the Australian
Financial Complaints Authority (AFCA). You
can call them on 1800 931 678.
- If you think a credit provider has acted unlawfully or in a
misleading way, you can complain to ASIC online
or call 1300 300 630.
ASIC Infoline: 1300 300 630
Please note that this is a summary giving you basic information
about a particular topic. It does not cover the whole of the
relevant law regarding that topic, and it is not a substitute for
© Australian Securities and Investments Commission 2011
Last updated: 12 Nov 2018