Help! I Can’t Pay Back My Loan

Loans are a type of financial agreement in which an individual or organisation borrows a specific amount of money from a lender, with the understanding that they will repay the loan with interest over a certain period of time. Paying back loans is important because failure to do so can result in negative consequences such as damage to your credit score, legal action, and increased debt due to interest and penalties.

When taking out a loan, it’s important to carefully consider your ability to repay it. This includes assessing your current financial situation, budgeting for regular payments, and planning for unexpected expenses or changes in income. Making payments on time and in full is crucial for maintaining a good credit score and avoiding fees and penalties.

However, if you are unable to pay back your loan, there are several options available to you.

When should I talk to my lender?

If you are having difficulty paying back your loan, it’s important to talk to your lender as soon as possible. The earlier you reach out, the more options you may have for resolving the issue.

Talk to your lender as soon as you know you will have trouble making a payment. This could be due to unexpected expenses, a loss of income, or other financial challenges. By communicating early, you can potentially work out a new payment plan or other solution before the situation becomes more severe.
Talk to your lender if you have missed a payment or are behind on payments. Ignoring the issue can lead to additional fees, penalties, and damage to your credit score. By reaching out to your lender, you can potentially avoid some of these consequences and work out a plan for catching up on payments.
Be honest about your situation and provide as much information as possible. This can include details about your income, expenses, and any changes in your financial situation. Your lender may be able to offer solutions such as a temporary payment deferral, a lower interest rate, or a longer repayment term.

Remember that lenders want to work with borrowers to find a solution that works for everyone involved. By being proactive and communicating early, you can increase your chances of finding a manageable solution for your loan repayment.

What are my insolvency options?

If you are having difficulty paying back your loan, there are several insolvency options available in Australia. These include the following:

Temporary debt protection (TDP)

Temporary Debt Protection (TDP) is a form of insolvency option that provides temporary relief for individuals who are struggling with debt. It is a new debt relief measure introduced by the Australian government in 2021 to help individuals and small businesses impacted by the COVID-19 pandemic.

Under TDP, eligible individuals can apply for a 21-day moratorium on their debts, during which time they are protected from legal action by creditors. This can provide a short-term respite for individuals who are experiencing financial hardship and need time to get back on their feet.

According to the Australian Financial Security Authority (AFSA), to be eligible for Temporary Debt Protection (TDP) in Australia, you must meet the following criteria:

You must have one or more debts that are less than $10,000.
You must be receiving a qualifying government benefit or have been affected by the COVID-19 pandemic (e.g., lost your job, had reduced work hours or business income, or had to close your business).
You must not have been bankrupt or entered into a debt agreement in the last 10 years.
You must not have applied for TDP in the last 12 months.

It’s important to note that TDP is a temporary measure designed to provide short-term relief for individuals who are struggling with debt. It’s important to seek professional advice before applying for TDP, as it may not be the best option for everyone. A licensed financial counsellor or insolvency practitioner can help you understand your options and determine the best course of action for your specific circumstances.

Debt agreements

Debt agreements are one of the insolvency options available to individuals in Australia who are struggling with debt. A debt agreement is a legally binding agreement between a debtor and their creditors that outlines a plan for repaying the debt over a set period of time.

To be eligible for a debt agreement in Australia, you must meet certain criteria, including the following:

You must be insolvent. This means you are unable to pay your debts as and when they fall due.
You must have unsecured debts of less than $133,278.60. This includes credit card debts, personal loans, and other unsecured debts. Debt agreements are not available for secured debts such as mortgages or car loans.
You must have a regular income and be able to afford the proposed repayment plan: The repayment plan must be affordable and based on your income and expenses.
You must not have been bankrupt or entered into a debt agreement or personal insolvency agreement in the last 10 years.
You must not have any assets of significant value: Debt agreements are typically only suitable for individuals who do not own significant assets, such as property or valuable investments.

(source: AFSA)

Under a debt agreement, the debtor makes regular payments to a debt agreement administrator, who then distributes the funds to the creditors. The debt agreement administrator also handles communication with the creditors, which can relieve some of the stress and pressure on the debtor.

One of the advantages of a debt agreement is that it allows you to avoid bankruptcy, which can have significant consequences for your credit rating and financial future. However, it’s important to note that a debt agreement may still have an impact on your credit score and financial reputation, so it’s important to carefully consider all of your options before entering into a debt agreement.

Personal insolvency agreements

A Personal Insolvency Agreement (PIA) is a formal agreement between you and your creditors to settle your debts. It is a legally binding agreement that allows you to arrange with your creditors to pay off all or part of your debts over a specified period of time.

According to AFSA, there are no debt, asset, or income limits for a PIA in Australia. The length of the PIA will depend on the terms negotiated with your trustee and creditors, and you may be able to retain your assets if the terms of the agreement are allowed.

However, it’s important to note that there are fees associated with proposing and managing a PIA. These fees will be deducted from the funds you contribute to the agreement and may reduce the amount available to pay your creditors.

To enter into a PIA, you must appoint a registered trustee who will act as your administrator. The trustee will work with you to develop a proposal for your creditors, which outlines how you will pay off your debts. Your creditors will then vote on whether to accept the proposal.

If the proposal is accepted, you will be bound by the terms of the PIA and must make regular payments to your trustee, who will distribute the funds to your creditors. The PIA can last for up to 5 years, during which time you must meet all the obligations of the agreement.

Bankruptcy

Bankruptcy is a legal process wherein an individual or a business is declared unable to pay its debts. It can provide relief from most debts, and allow the person to make a fresh start financially. An individual can enter into voluntary bankruptcy by completing and submitting a Bankruptcy Form. Alternatively, a creditor can initiate the process by obtaining a court order, which is known as a sequestration order.

Bankruptcy in Australia usually lasts for three years and one day, and during this time, the person is required to provide details of their debts, income, and assets to their trustee, who is appointed to manage the bankruptcy.

The trustee can either be the Official Trustee, which is managed by the Australian Financial Security Authority (AFSA), or a registered trustee appointed by the bankrupt individual. They can sell certain assets to pay off their debts, and the bankrupt individual may need to make compulsory payments if their income exceeds a certain amount.

According to AFSA, to apply for bankruptcy in Australia, an individual needs to meet two main requirements:

Be insolvent, which means they are unable to pay their debts when they are due.
Be present in Australia or have a residential or business connection to Australia.

There is no minimum or maximum amount of debt or income required to be eligible for bankruptcy. Additionally, there is no fee to apply for bankruptcy, although there may be costs associated with managing the bankruptcy process, such as the sale of assets to pay off debts or the appointment of a registered trustee.

Are there consequences for filing for bankruptcy?

Yes, there are consequences for filing for bankruptcy. Some of the main consequences include:

Loss of assets: When you file for bankruptcy, your assets may be sold by the trustee to pay off your debts. This may include your house, car, or other property.
Limitations on credit: Bankruptcy can impact your credit rating and make it difficult for you to obtain credit in the future.
Travel restrictions: Bankruptcy may restrict your ability to travel overseas, as you may need to seek permission from your trustee before leaving the country.
Business ownership: Bankruptcy can impact your ability to own or operate a business, as you may be subject to certain restrictions and regulations.
Employment: Bankruptcy can also impact your employment, as some employers may view it as a negative factor in hiring decisions.

It’s important to note that these consequences can have long-term impacts not only in your financial life, but even also in your personal life. Therefore, it’s important to seek professional advice before deciding to file for bankruptcy. A financial counsellor or registered trustee can provide advice on your options and help you understand the potential consequences of bankruptcy.

Do the insolvency options only apply to unsecured debts?

These insolvency options generally only apply to unsecured debts, meaning debts that are not secured by any assets or property. Examples of unsecured debts include credit card debts, personal loans, medical bills, and some tax debts.

If you have secured debts, such as a car loan or a mortgage, the lender has the right to repossess the asset or foreclose on the property if you default on the loan. In this case, the lender may be able to recover the outstanding debt through the sale of the asset or property.

If you are unable to make your payments on secured debts, you may be able to negotiate a repayment plan with your lender or explore other options, such as selling the asset or refinancing the loan.

The insolvency options may not apply to secured debts, but a financial counsellor or registered trustee can provide advice on your options and help you understand the implications of defaulting on a secured debt.

Is the process different for bank loans and online loans?

In terms of the insolvency process, there is generally no difference between bank loans and online loans. When you file for insolvency, whether it be bankruptcy, debt agreement, PIA, or TDP, all of your unsecured debts are typically included regardless of the type of loan or creditor. This includes credit card debts, personal loans, payday loans, and other unsecured debts.

However, the specific terms of your loans and the lender’s policies may impact the insolvency process.

For example, some lenders may require you to pay back a certain amount of the loan before they agree to discharge it through bankruptcy or a debt agreement. Similarly, some lenders may have specific procedures for recovering their debt, such as engaging debt collectors or initiating legal action.

It’s important to seek professional advice from a financial counsellor or registered trustee before making any decisions about insolvency. They can provide advice on your options and help you understand how your specific loans may be impacted by the insolvency process.