As Australia’s housing debt continues to mount up, with interest-only loans now accounting for nearly a quarter of all owner-occupier mortgages, the debt management industry is growing. Debt management companies are marketing debt solutions to Australians who are struggling with credit card or mortgage debt. Just how safe are these debt agreements?
Debt solution or debt vultures?
Earlier in April, new data released by a federal agency showed a rise in the number of Part IX debt agreements. Aimed at lower income earners, agreements under Part IX of The Bankruptcy Act are being marketed as a “debt solution” for Australians who are struggling to repay credit card debt or mortgage debt.
A form of insolvency, the number of these agreements totalled 12,150 in the 2015-16 financial year and accounted for more than 40 per cent of all personal insolvencies. While these agreements may seem the answer to an impossible financial situation, some consumer groups are highly critical of the industry for promoting them.
Fiona Guthrie, CEO of Financial Counselling Australia which runs the free National Debt Helpline, said it was “quite concerning” that these for-profit insolvency agreements are heading “ever north”.
“The only option you’ll get offered by these providers will inevitably be very expensive – high upfront costs, high ongoing charges, and not necessarily the best choice,” said Ms Guthrie.
“We think half of the people going into debt agreements would be better off with full bankruptcy, or negotiating directly with their creditors.”
Targeting people struggling with debt
The Consumer Action Law Centre agrees that debt management companies are targeting people struggling with debt while turning that debt into their own profit.
“There’s a growing and insidious set of business models in Australia that target people struggling with debt, and profits from their stress and fear,” Consumer Action spokesman Jonathan Brown said.
“Australians are carrying a huge amount of personal debt, and these companies have identified this and turned it into a gross opportunity for profit. They’re poorly regulated, they may make people’s financial and personal situations worse and the core of the business model is preying on people living on the edge.”
Debt agreements can be useful if you need to protect your assets, but they should only be considered as a very last resort, said Mr Brown, and only after you’ve sought advice from a free, independent and confidential financial counsellor.
Lack of regulation a 'failure of Parliament'
Consumer advocates are concerned that debt management companies are operating in a regulatory void. In 2016, the Australian Securities and Investment Commission (ASIC) published a report on the growing debt management industry. The report revealed that debt management firms charged excessive fees that often leave consumers worse off.
National debt helpline
If you are facing mounting debts, it’s vital that you contact the free and independent national helpline to discuss your situation with a financial counsellor. You may be able to access hardship or concessions from your bank or other providers to help you get back on track. If you’d like to find out more about managing your debt and planning for your financial future, contact a Mortgage Express broker.
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