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If you have to pay off a debt but you can’t afford to, it is sometimes best to try to negotiate with the creditor. You might be able to agree on a method of payment that is easier for you. There are a number of different methods of payment that you might be able to suggest as an alternative to paying the full amount in a lump sum. You should be sure of what the alternatives involve and avoid those that you cannot fulfil. You can get help to negotiate and to understand your alternatives. Also, make sure you do your negotiations by writing letters and always keep copies. Every agreement should be in writing and signed by both parties. Talk to a financial counsellor or a lawyer if you need help with anything and always get independent legal advice before signing any agreement.
If you can pay small amounts of the debt at regular periods, you might be able to pay by instalments. If you want to pay by instalments make sure that the amount you agree to is affordable. If you cannot pay the instalments you agree to pay, the debt recovery process will continue.
If the inability to pay is temporary, you should ask for a ‘moratorium’ for a period. This means that you would not have to pay anything during the period of the moratorium. You will still have to pay when the period is finished. If you ask for a moratorium, ask for no interest to be charged for that period as well.
If you are unlikely to ever have enough money to pay the full amount you owe, you might be able to offer to pay less than the full amount in a lump sum. Some creditors prefer to accept this smaller amount than wait a long time for their money or not get anything at all.
If you are suffering a severe hardship and will never be able to pay off any of the debt, you might be able to negotiate
to have it waived. This means that the creditor agrees not to pursue you for the debt. You will have to prove that you have a good reason why you will never be able to pay, such as having no money or assets and no chance of that ever changing.
Note that having a debt "written off" is merely a book entry, and does not necessarily mean that your legal
obligation has gone.
Where possible, it is better to prepare a Deed of Settlement extinguishing the debt. A Deed of Settlement is a legal
document which is executed (signed before witnesses) by both parties and is similar to a contract. An executed Deed
does finalise your legal obligation but a creditor is unlikely to agree to sign one unless there is some benefit to
him/her/it such as the payment of a sum of money.
Note: That having a debt "written off" does not necessarily mean that your legal obligation has gone.
(see also factsheet Hardship Variations to Loan Repayments).
If you took out a loan for personal or domestic items, such as a car for your own personal use (not for business), and you are having trouble making the repayments because of financial hardship, special rules apply. There is a law called the Consumer Credit Code, which gives you the right to ask for the loan contract to be changed so that you can get back on your feet. Usually the changes will be for a short time until your situation gets better. You are allowed to ask for the payment amounts to be made smaller. You can also ask for the payments to be stopped for a short time. Sometimes you might need to ask for both of these things. If your request is granted, your loan will be for a longer period than it was before. You should make your request in writing. There are helpful sample letters you can use, which are available from the Consumer Credit Legal Centre website.
If the person or company you owe money refuses your request
for a variation to the loan you can make an application to the Consumer,
Trader and Tenancy Tribunal (CTTT in NSW) and ask them to order the
variation. The CTTT is like a court but it is more informal than a
court and set up so that consumers and parties can represent themselves.
Their orders are binding on people. If you would like assistance with
anything relating to consumer credit, you can get legal advice from
a legal centre. Redfern Legal Centre has a specialist Credit and Debt
team who can assist you with these kinds of loans. Other solicitors
and financial counsellors can also help you. There are also helpful
guidelines you can use, which are available from the Consumer
Credit Legal Centre website.
Usually, consolidated loans bring two or more debts together into the same loan, which is then paid off by instalments. These can sometimes be helpful but they are often not as good as they sound. Sometimes the interest rate is higher and the repayments can be equal to, or even more than you were already paying. Normally, you would have to pay a loan establishment/approval fee. Make sure you seek good financial counselling before you decide to get a consolidated loan. Remember that this may only be a temporary solution and sometimes the terms of the loan will bring greater hardship to you down the track. If the interest rate is higher on your new loan than your old ones, you will end up paying more money in repayments.
When there are many debts, payment of one can mean the others do not
get paid. Organising a pro rata payment system where all the debts are
paid a bit each month can help this. It needs to be set up properly with
agreement from all the creditors and if you think this is the option
for you, it would be sensible to seek assistance from a financial counsellor
to help.
If informal negotiations do not seem to be working or you are having
trouble communicating but your creditors say they are willing to negotiate,
you may wish to consider mediation. Mediation is a voluntary process
(although Courts can now require parties to mediate in certain circumstances)
where you and your creditor meet with an independent mediator who can
assist in clarifying any issues and may encourage both parties to compromise
until they reach agreement. Community
Justice Centres provide free mediation services including free interpreter
services.Click
here for their website
If you are unable to come to an agreement with your creditors for the payment of your debts, then you may be forced to consider the possibility of bankruptcy or a debt agreement. Neither option should be considered without seeking advice from a financial counsellor or community legal centre. For further information on Bankruptcy and Debt Agreements, see
the Consumer Credit Legal Centre website fact sheets on Bankruptcy.
Produced by Redfern Legal Centre.
This factsheet is no substitute for legal advice. If you have a problem
please seek legal advice from your local community legal centre
Last updated January 2006