In Financial Difficulties? Beware Of Quicksand With Fast Financial Fixes
Financial Hard Times Happen to Everyone At Aylward Game, we pride ourselves on offering high-quality legal services to our clients taking into account their unique circumstances. It’s great when we see clients come to us in good financial health looking to build their wealth and we enjoy seeing them prosper. However, with the current economic […]
In Financial Difficulties? Beware Of Quicksand With Fast Financial Fixes
Financial Hard Times Happen to Everyone
At Aylward Game, we pride ourselves on offering high-quality legal services to our clients taking into account their unique circumstances.
It’s great when we see clients come to us in good financial health looking to build their wealth and we enjoy seeing them prosper. However, with the current economic climate and the increasing pressures on us to buy a house, car, and the other trappings in life, feed ourselves and our families, build our careers, pay our taxes and hopefully have some fun along the way there will be occasions where we experience financial difficulties.
In my prior life as a Chartered Accountant and Credit Risk Manager for a number of financial institutions I have hopefully assisted many people when they have been at their lowest financially but I cannot express how sad it is when a client comes to you have already tried a “financial quick fix” – the damage is often done and may be hard to fix.
This article will look at 4 such quick fixes that have the potential to significantly assist people in financial difficulties but you need to understand precisely the nature of the arrangement into which you are entering and the potential pitfalls that exist. It will also look at what you can (and should) always do when facing financial difficulties.
The Definition of Madness
It is said that the definition of madness is probably supporting English cricket but a more accepted definition is doing the same thing over and over again and expecting a different result!!
If you are in financial difficulties then you need to look at what caused these difficulties – to fail to do so is to run the risk that you end up back where you are even if you can overcome your current financial problems.
We cannot stress enough how important it is to look at the need for behaviour or lifestyle changes before entering into any financial quick fix.
OK so on to the financial quick fixesRequest Evaluation
4 FAST FIXES
Pay Day Lending/Pawning Goods
This involves what is essentially a short term loan – generally to the next pay day at which time the loan is repaid and you can get on with your life. A related concept is pawning goods where you leave goods as security for a short term loan and get them back when you repay the loan.
A good idea where you have a short term need and are confident that you can repay the loan when it falls due – for example an unexpected medical/dental or vet bill.
Here’s the problem – the fees (sometimes equal to a significant percentage of the loan) and interest rate can be very high – try over 35% per annum !! Unfortunately the underlying long term financial issue is not being addressed so many pay day loans need to be repaid by another pay day loan and before long you can be in a vicious circle of debt.
Debt Consolidation Loans
This is where you roll all your loans into 1 loan and then just have to make one easy monthly payment – sounds easy, doesn’t it?
Again if you have had a short-term spending spree/an unexpected financial expense that is unlikely to recur and are confident that you will be OK if you can overcome this immediate problem then yes this is a good idea.
However, there are 2 large problems here
- research has shown that over 80% of consolidation loans end up being rolled into another debt consolidation loan because the underlying financial issue is not being addressed; and
- often the debt consolidation process involves refinancing personal loans (often for cars, consumables) into a home loan or a 5/7 year personal loan and here you will be paying a loan off long after the asset acquired is no longer of any value.
This is a common pitfall for those wondering what to do if they are broke!
Debt Agreement (Arrangements Under Part IX of the Bankruptcy Act 1966)
We can only briefly touch on these arrangements in an article of this size. However, essentially they involve you offering your creditors, through a formal arrangement, a certain number of cents in the dollar over a period of time. There are a number of criteria that you must meet.
Agreements are administered through a Debt Administrator who will write to your creditors and make your proposal to them and if the prescribed percentage agree then you enter into that arrangement and if you keep to its terms then you creditors cannot take action against you re the remaining amount. Special rules apply for secured creditors.
You beauty Greg – so I just pay my creditors say 40 cents in the dollar and am home free – where do I sign up?
There are a few issues
- Fees charged by the debt administrator can be significant;
- By offering your creditors the arrangement you commit an “act of bankruptcy’ that can be used by a creditor to make you bankrupt; and
- The arrangement will be recorded on the National Personal Insolvency Index (NPII) and this may be seen by potential lenders, landlords etc in the future.
However the main issue is that without a necessary change in behaviour the arrangement is likely to fall over (and a significant proportion do) and even if you meet the arrangement you may fall back into financial difficulties.
This is where you seek assistance from your creditors, predominantly financial institutions for home loans, and advise that you are in financial hardship – this is called giving them a “hardship notice” (exact words are not required) and ask them to consider providing you with financial hardship assistance.
Here are some key timeframes:
- Creditor has 21 days from receiving your hardship notice to advise if they want more financial information to assess your notice
- You have 21 days from receiving a request for financial information to supply it to them
- Creditor has 21 days from receiving your financial information, or 28 days from requesting the information if you do not supply it, to assess your application for financial hardship
The range of assistance that you can receive is very wide and should be based on the creditor assessing your financial position.
This again is a really good idea where you have had a short-term issue that you can overcome with time – a breathing space.
However it will not fix a long term issue so if you are offered say a 3 month capitalisation of payments (you are not required to make the payments but interest continues to accrue to the loan) and are not confident that your position will be significantly different in 3 months then exercise great care here.
The main problem with these arrangements is that they often fall over or if you meet the terms of the arrangement you are back where you started but quickly in financial difficulties again. Even if you have been left out of a will there are things you can do.Request Evaluation
So What Can You Do ?
There are 5 things that you can always do NOW
- Adopt a long term approach – financial difficulties do not arrive overnight and will not be fixed overnight either
- Prepare a budget and be honest with what you spend – it will be very illuminating
- Consider where economies can be made
- Talk openly to your creditors – tell them your position and what action you intend to take – most (if not all) will look to work with you
- Plan your action and stick to it – many clients that I have assisted use those 100 packs of envelopes and put money into each envelope for major bill (rent, gas, electric etc) and most importantly their “Fun” envelope – this is really important because without having some fin money you will be in likely to stick to your plan
Good Luck With Your Financial Health
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