Credit specialist Merrilyn Mansfield
on why quick action is best when your client is in credit trouble
There are all kinds of circumstances that arise in life unexpectedly. Loss of employment, illness, divorce, separation and accidents can happen in an instant and create stress on people who have bills to pay and families to support.
There are many helpful services available to people when they hit hard times. There is help with debt negotiation, including setting up affordable payment plans, as well as avenues to deal with hardship that give people extra time to make payments while they get through the rough patch. There is also assistance with credit repair that aims to verify that any defaults or judgments that were placed on a credit report during the rough patch were put there correctly as these listings can have big consequences.
Often people are unaware of the amazing support services they can access when things get tough. It is also important to remember that these services are more useful to your client in the early stages of their mortgage or debt distress because once more serious legal action is launched there are less avenues to assist that are open to financial advocates. It is therefore so important to recognise a client in distress and advise them to seek help straight away. Burying your head in the sand will not help things get better.
DON’T DELAY IN SEEKING HELP
In fact, things can get a lot worse. For example, if a client is in financial distress and payments have slowed or dried up, a credit provider might escalate the matter to enforce the debt. This could lead to a court judgment or bankruptcy proceedings being instigated against your client. Court judgments can often be sought on credit card debts where the payments have dropped off and quite suddenly the credit provider can call in the entire amount of the debt, payable almost immediately. In this instance, you may have been paying a fairly small monthly payment but suddenly the credit provider accelerates the debt and demands you pay the entire balance.
After a court judgment is entered, if the debt remains unpaid, the credit provider or a debt collector who has purchased the debt, might begin bankruptcy proceedings. If your client has equity in their home or business but is cash flow poor because of a current financial or personal problem they are particularly vulnerable because once a bankruptcy notice has been issued by a creditor, a debtor has 21 days to pay or to reach an alternative arrangement. If no agreement can be reached, a creditor’s petition can be brought before the federal court.
This can be for a debt as low as $5,000 where there is only one creditor, so remember that your client does not have to be a serial offender to be made bankrupt, they need only struggle to pay one small debt and be completely up to date with all their other debts. If the creditor’s petition is successful in court a trustee will be appointed to manage the bankrupt’s estate.
BEWARE PRIVATE TRUSTEE’S FEES
It is at this point that things can escalate out of control, particularly if a private trustee is appointed. Private trustees are often large accounting firms employed by big companies to resolve disputes that make a business out of bankruptcy. Private trustees tend to apply the same large-fee approach to small personal bankruptcies as they do to the corporate world.
Private trustees charge their fees out at levels of seniority and communication between junior staff and their superiors means that costs can quickly escalate. Before long what was a $5,000 credit card debt can blow out in bankruptcy to a debt of $80,000-$90,000 when the trustee’s fees are added in – to annul the bankruptcy – and this will be deducted from any equity you have if you can’t pay the full amount by the court date.
As it is the creditors that approve the trustee’s fees the bankrupt has no control over the amount that might accrue and be deducted from the sale of assets. And if your client’s primary asset is their home this process can quickly reduce a large portion of the equity in their most valuable asset to virtually nothing.
UNABLE TO BORROW
Once a client finds themselves in these circumstances the options are limited. Basically the client needs to find the sum owed or surrender their assets to satisfy the debt. If your client cannot find the money, it will be impossible to find a lender to write a loan to finance payment of the debt. No one will loan funds to a bankrupt in this sort of predicament.
If the client does not pay, the private trustee will likely take action against the bankrupt’s estate. In some circumstances this means that the debtor will be forced to vacate their home or other property in 28 days so the property can be sold to satisfy the debt. If the equity is sufficient, the sale of the property will result in the annulment of the bankruptcy. If not, a debt is still owed so your client will remain bankrupt.
RECOMMEND YOUR CLIENT GET HELP EARLY
As finance specialists it is therefore very important to look for the signs of mortgage or debt distress in your client base and refer your client to services that can assist them. Do not delay and have a frank and open discussion with your client about the downside of doing nothing. If the client does not take control of their financial situation, someone else will and this can have lasting and devastating results, both personally and professionally. All of this pain can be avoided by picking up the phone and calling someone who can help.
Merrilyn Mansfield is a consumer advocate and the lead adjudicator and researcher for Princeville Credit Advocates, a Sydney and London based credit repair company. She is fascinated with consumer laws that relate to credit reporting and in advocating for a consumer’s right to a correct credit report. For more information, please visit www.wemend.com.au or email firstname.lastname@example.org.
This article is from Australian Broker issue #11.15. Download the issue to read more.