Unfortunately, many students drift into debt, often without even realising how big the problem has become. Usually, this happens as a result of excessive credit card use, because it is so easy to pay by card and just pay the minimum amount each month. However, one day after perhaps months of increasingly frequent sleepless nights and soul searching, you have finally come to the realisation that you just cannot manage to get your debt under control. In fact, it keeps getting higher and higher each month as the interest on your debt, mainly credit card debt, keeps getting added to the principal. The amount just continues to climb and you are getting more and more depressed. It is interfering with your studies and taking control of your life.
YOU NEED HELP!
Get advice
You don’t have to deal with this on your own. Professional advice is available to discuss various options. Given that you don’t have enough money to consult a lawyer or an insolvency accounting specialist, a good starting point for free information is the government website of the Australian Financial Security Authority. The most important thing is not to stick your head in the sand and hope that the debt will go away. It won’t. It will just get bigger. So, be proactive.
Below is a summary of some options available.
Informal Agreement
Depending on the level of your debt, you can talk to your creditors (the people you owe the money to) to try to arrange an agreement with them to accept an amount smaller than the total debt payable over a specific period of time, say one year or two. Banks and financial institutions are often receptive to such arrangements since it will remove the need for legal expenses for them, which might be as high as the debt you owe. Contact a community legal centre, if you cannot afford a lawyer. They can advise you and may be prepared to negotiate the informal arrangement on your behalf.
Personal Debt Agreements
If you cannot reach an informal arrangement, you may be able to reach a Personal Debt Agreement with your creditors. This is an agreement between you and all the people to whom you owe money (creditors) to accept a specific sum of money to be paid over a specific period of time. These types of agreements only apply to unsecured creditors.
You are only eligible to enter into this type of agreement if your debts do not exceed $108,162.60 and you do not earn more than $81,121.95 after tax per annum.
Pros
If you stick to the agreement and make all the payments in accordance with the agreement:
- Your creditors will stop hassling you;
- All the creditors are bound by the agreement; and
- At the end of the time specified in the agreement, the slate is wiped clean of the debts which existed at the commencement of the agreement.
Cons
- You will need to appoint an administrator to put together the proposal to the creditors and call a meeting of creditors, a majority of whom must accept it;
- The administrator will charge a fee for his/her services in the order of $15,00-$20,000;
- The agreement must be registered with National Personal Insolvency Index (NPII), which is a public record;
- Particulars of the agreement will appear on your credit record with VEDA, an agency that collects credit information on people who have ever applied for a loan, have judgement entered against them or have been insolvent;
Part IX Debt Agreement
Unlike the Personal Debt Agreement, there is no limit on the debt you owe or the income you earn to enter into such an agreement.
How it works
You must appoint a controlling trustee, who can be a registered trustee in bankruptcy, the Official Trustee or a qualified solicitor, who will help you together with a proposal to pay you, creditors. The trustee will call a meeting of creditors, a majority of whom by number and 75% by value of debt, must vote in favour of the proposal. If the proposal is accepted, all creditors are bound by it, even those who voted against it. If the proposal is rejected the creditors can, but are not obliged to, vote for you to become bankrupt.
The other pros and cons are similar to the Personal Debt Agreement discussed above.
Bankruptcy
You can either choose to lodge a debtor’s petition, ie making yourself bankrupt, or wait until one of the creditors commences bankruptcy proceedings against you. If you file your own debtor’s petition you will have more control of the timing of the process.
Consequences of bankruptcy
- You must prepare a statement of your assets and liabilities for the trustee;
- As with the other 2 types of debt agreement there will be a permanent record of the bankruptcy on the NPII and VEDA will be notified;
- Apart from certain necessary household items and tools of trade to a value of $3,700 , all your assets will vest in the trustee of your bankrupt estate, who can sell them and use the proceeds to pay the creditors rateably. Go to the AFSA website for a quick guide on what assets are excluded;
- What about your car? You can keep your car if the total value of the car, less the amount owing, is under $7,600;
- You cannot travel overseas without your trustee’s consent;
- You will probably lose all your credit cards;
- If you have nobody financially dependent on you and earn over $54,081.30 per year, you will have to contribute part of your income to the trustee to pay unsecured creditors.
The advantages of bankruptcy
- The trustee will sell your assets to pay your creditors rateably. If you have no assets to speak of, except a computer and a car with a value under $7,600 you will not actually pay your creditors anything. They will miss out completely. However, if you acquire assets during your bankruptcy, these will generally also vest in the trustee, who will sell them for the benefit of the creditors;
- You will not have to pay an administrator;
- If you earn under $54,081.30 per annum you will not have to contribute any of your income to pay your creditors;
- All your debts at the beginning of the bankruptcy will be wiped at the end of the bankruptcy;
- If you co-operate with your trustee, the bankruptcy normally ends after 3 years. After this, the slate is wiped clean and you can get on with your life.
The above is a short outline only and assumes you are a student with minimal assets. Please consult the AFSA website for more information.
Conclusion
If cannot manage your debt, act now before you finish your studies and start to earn serious money. Creditors can take legal action against you for 6 years after the debt arose and have judgement for that debt entered against you. VEDA will have a record of this. Creditors can commence bankruptcy action against you, if the debt is higher than $5,000, for a period of 6 years after the date of the judgement. This means that you can have this debt situation hanging over you for 12 years.
DEAL WITH IT NOW!
Take heart, going bankrupt is not the end of the world. Many famous and subsequently very successful people have been bankrupt during their lifetime, eg Henry Ford, Walt Disney, Kim Basinger, even Donald Trump and closer to home, Alan Bond.
Gisela Ramensky BA LLM writes for Credit Card.com.au she worked for over 30 years as a commercial and litigation lawyer. She also has extensive experience in the areas of both corporate and personal insolvencies, advising numerous clients facing bankruptcy, as well as acting for financial institutions in the area of debt recovery. She was a member of the Council of the NSW Law Society for 3 years, chaired several committees and was a member of the Business Law Committee for 4 years. For the last 20 years, she operated her own practice in North Sydney.