Debt solution companies vs financial counsellors

With extremely high levels of household debt at the moment, many Australians are currently struggling to keep up with their repayments.

This runaway debt is catching up to more of us, with the Australian Financial Authority this week revealing that total personal insolvencies increased 0.6 per cent in the September quarter 2015 compared to September quarter 2014.

This was a second consecutive rise, with personal insolvencies in June quarter 2015 rising 0.9 per cent compared to the same quarter last year.

The new statistics also revealed that the number of debt agreements in the September quarter increased by 2.4 per cent compared to last year while bankruptcies fell by 0.1 per cent and personal insolvency agreements fell 33.3 per cent.

With this rise in the number of insolvencies and debt agreements, it’s likely that many Australians have sought out the services of debt solution companies. In desperate times of overwhelming debt, the advertised promises of these firms to “solve all of your finance problems” can be quite tempting.

But is there a catch?

Let’s take a look at these companies and what they do.

What are debt solution companies?

Debt solution companies are firms that people pay to manage their personal debt problems. These groups usually offer to do this through:

  • Debt consolidation and
  • Debt agreements

Debt consolidation involves repackaging all debts into one loan that may or may not have different fees and interest rates. Companies that offer debt consolidation have to be licensed with the Australian Securities and Investment Commission (ASIC).

These groups can also set up debt agreements with creditors on your behalf when you cannot pay everything you owe but want to avoid going bankrupt. For a fee, the debt solution company can act as administrator to organise a debt agreement proposal based on what you can afford to pay. You pay creditors back the settled amount over a set period of time.

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Potential dangers

Since debt solution companies are run for profit, sometimes it is worth considering whether they are there to help or to take advantage of people in desperate situations. Their fees can set you back even further and their ‘solutions’ can actually hurt you more.

For instance, the new loan they consolidate your debt into might have a higher interest rate, costs or be longer term. When the loan is longer term, bear in mind that although your repayments and interest rate may be lower, you’re paying more in the long run though fees and interest over the years. Also, if they’re consolidating your unsecured debt (e.g. credit cards) into a secured loan (your mortgage), you could be putting your home on the line. The mortgage might become even harder to pay off, thus putting your home more at risk.

The adverts for these debt solution companies can often downplay the serious consequences of their measures, so it’s important to put your emotions aside and be rational when considering signing up with these companies.

Free Financial counselling

As opposed to debt solution companies which strive to generate profits for shareholders, the number one priority of free financial counselling is to help those in need. Financial counselling can offer independent and confidential financial advice to improve your financial situation in a variety of ways. This can include helping you do up a budget, seeing if you’re eligible for government assistance or referring you to other social help services if they recognise a wider problem (e.g. gambling help, drug rehab, mental health counselling).

Financial counsellors can do for free what many businesses might charge you for. Instead of directing you towards the most desperate measures, they can help you to consider everything you can do to manage your debt in the most efficient way possible.

If you need debt help, you can call the financial counselling hotline on 1800 007 007 from 9:30am to 4.30pm, Monday to Friday. Check out ASIC and Financial Counselling Australia’s online map of financial counsellors to help find a service near you.

 

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Take charge of your debt

Of course, if you want to get control of your debt yourself, CANSTAR has a number of articles to help you do this.

First off, you can inspire yourself by reading our 40 ways to save money (if that’s not enough we’ve got 30 more ways to save money).

For potential solutions to your current debt problems, check out five ways to get on top of your debt and how to de-clutter your debt. If you’ve faltered in the past and you’re ready to correct those mistakes, read how to improve your credit rating.

Also, find out if balance transfers are a good idea and how to consolidate your debt.

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