Informal debt negotiations

The first and simplest remedy when you’re in debt is to get in touch with the person or organisation you owe money to (your creditor), explain your changed circumstances and negotiate an arrangement to pay.

If you can’t make a full payment in the short term, it may be better to pay what you can rather than nothing at all. Then you’ll be reducing your debt and the amount of any interest due as well as demonstrating good faith. Note that in most credit contracts there is a provision which allows your lender to charge higher (default) interest once you are behind in your payments. View the fact sheet ‘Do I have to pay an old debt?’ to see if there are any old debts you do not need to repay.

Speak to your creditor as soon as possible

If your trouble with meeting your payment goes beyond a single payment, you need to contact your creditor and discuss an arrangement to pay. Be sure to be specific about how, when and over what period you’ll make payments. Creditors will often work with you as long as your offer is reasonable, you keep up with agreed payments, and you keep in touch with them.

Be realistic when you offer to make a part payment on your debt. Use your budget to work out how much you can afford, keep a little on hand for emergencies, and don’t take on debt that you simply cannot afford to pay back.

When your creditors consider your request for formal payment arrangements, many of them, such as lenders and utility providers, are obliged to consider flexible payment arrangements or hardship variations that you can afford in your current circumstances.

In some circumstances, they’ll be willing to wait for a payment or accept a lesser payment without formalising your agreement. You will have demonstrated your intention to pay the debt by contacting them, and they’ll realise you are not simply ignoring your contractual obligations.

You should put the agreement in writing to your creditor or ask them to do so. Keep a record of all phone calls and copies of all correspondence you have with your lender or creditor regarding agreements for the payment of your debt.

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Informal options for dealing with debt

You may propose an informal debt payment arrangement to your creditor based on the following options:

  • request extra time to pay if you have reason to believe your change of circumstances is only short-term.
  • make a reduced payment if you cannot make a full payment but want to demonstrate your intention to pay what you can. If your circumstances are ongoing, you might need to enter a formal agreement for ongoing reduced payments, but your creditor may accept a reduced payment for a short period.
  • negotiate a waiver for the interest on the debt if you cannot make the original payments, though most creditors are unlikely to accept this.
  • make a debt reduction offer. That is, offer what you can as full and final settlement of the debt despite it being less than the amount owed. Some creditors will accept an offer like this to clear the debt.
  • ask for a waiver for the debt if you won’t be in a position to pay the debt for some time. Your creditor may accept this suggestion if it is clear that you have no ability to pay now or into the future.

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How much should an informal payment be?

After paying your priority debts you may find yourself with very little money to pay your other creditors. If you’re in this position you should inform your creditors and ask them to wait until your circumstances improve for payment or you could offer a token payment of a few dollars per month, or pay them a reduced amount. Don’t worry if your offer looks very small. Your creditors may prefer you pay a small amount regularly than make promises you can’t keep.

You need to be aware that they may commence court action against you. Therefore you should consider applying to those of your creditors who are lenders regulated by consumer credit laws for a formal credit hardship variation.

Paying all your debts individually can become very complicated. Speak to a financial counsellor if you need help working out how much you can afford to pay each of your creditors, and ideas about how to simplify debt payments. If you have no assets (such as a house) and a modest income, bankruptcy may be a viable option for you and one you can discuss with a financial counsellor.

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