Good Debt vs Bad Debt – 7 Tips On How To Remove Debt
There are plenty of things that you can do to clear bad debt that you don’t need to pay. In this article, DG Institute founder and CEO, Dominique Grubisa presents good debt vs bad debt and the 7 Tips on how to remove debt.
How to remove debt?
- Identifying and Acknowledging debt
- Leveraging the Law
- Check the lending licence
- Be wary of refinancing risks
- Use non-disclosure agreement to your advantage
- Check if a debt is statute barred
- changes in circumstances may benefit you
Debt is one of those taboo subjects that few people choose to talk about.
This is especially the case for people who don’t think they’re struggling with debt or those who believe they only have good debt. They’re not receiving phone calls from debt collectors or experiencing sleepless nights.
However, they’re carrying a lot of debt that they don’t need to carry. They may have high incomes and be able to afford the repayments. Yet, they’re still paying so much interest that they could avoid.
The Australian Bureau of Statistics (ABS) points this out. In its 2015/2016 Household Debt and Over-Indebtedness Report, it says:
“High-income households were also more likely to be over-indebted. One-quarter of the households in the top income quintile were over-indebted compared to one-in-six (16%) low-income households (in the bottom 20%).”
That’s exactly what credit card companies want.
They want people who aren’t in financial pain to carry high-interest debt. They know you’re going to make the repayments and they get to profit from the interest every month.
You could find yourself paying hundreds of dollars in interest every month if you constantly keep your credit cards maxed out.
That’s the issue that this article aims to solve. It’s going to look at some tips for clearing your debts so that you can retain that money.
But first, it’s important to note the different types of debt.
The Difference Between Good Debt Debt And Bad Debt
Not all debt is bad debt.
You can sometimes use debt as leverage to get ahead. For example, using a credit card to pay for part of a property is good debt. That’s especially the case if you know the property will generate a high enough profit to cover the interest repayments.
However, mistakes do get made and people end up over-indebted. In fact, the previously mentioned report from the ABS highlights this:
“In 2015-16, based on the ratio of debt to either income or assets, around three-in-ten households (29%) were classified as ‘over-indebted’.”
Many of these people have a debt anchor. They have credit cards that they’re making the minimum repayments on, which means they’re constantly carrying this burden around.
There are also people who have to rob Peter to pay Paul. They’re struggling under the weight of their debt and just trying to find ways to make repayments month-on-month.
This is all bad debt that leads to other problems.
An article in The Guardian reports that over-indebtedness has led to mortgage stress becoming a major problem:
“The burden of housing costs is biting even in Australia’s wealthiest suburbs as an unprecedented one in four households nationally face mortgage stress.”
This is the risk that you may face it you continue to carry your debt anchor. It’s crucial that you relieve yourself of that burden so you can continue to build wealth and create a stable future for yourself.
The question is how?
These are the seven tips that will help you to get rid of your debt anchor.
7 Tips On How To Remove Debt
Tip #1 – Acknowledging Debt
Having debt is not a shameful thing.
Unfortunately, many people believe it is, which is why it’s become such a taboo subject. However, the scale of the problem is such that it’s affecting millions of Australians.
You may not think that you have a debt problem. However, if any of the above resonates with you, it doesn’t matter how high your income is. There’s still an issue of bad debt that needs clearing and you’re lying to yourself if you don’t confront it.
Don’t allow the stigma that surrounds debt to stop you from doing that. Talking about it is the first step to accepting that it’s an issue. From there, you can work to clear it.
Tip #2 – Leverage the Law
With the debt out in the open, you can start taking steps to do something about it.
Australia has something called the National Credit Code. This is a set of laws implemented Australia-wide that protect consumers in regards to borrowings and debt.
This code doesn’t cover business debt. However, every state has its own laws that apply in that area. For example, New South Wales implements reviews to ensure business contracts are fair. Other states have laws relating to deceptive conduct, unconscionable conduct, and harassment.
The point is that you have protection that you can lean on in times of trouble. Leveraging these laws can help you to escape a debt burden if you do it the right way.
Tip #3 – Check the Lending Licence
There are many loan sharks and lenders that don’t have the right licencing for the lending that they do.
Lenders need to have an Asset Credit Licence. The Australian Securities & Investments Commission makes that clear on its website:
“If you are setting up a new consumer credit business, you must not engage in credit activities until you have been granted a credit licence, or you are otherwise permitted to engage in credit activities.”
If your lender doesn’t have the correct licence, it’s possible that you can write off the entire debt. This isn’t likely to be the case, especially if you’ve borrowed from a major lender. However, it’s worth checking if you borrowed from a smaller lender.
Tip #4 – Be Wary of Refinancing Risks
Many people opt to refinance in an effort to reduce their debts.
A lender may approve that and provide you with a line of credit. The idea is that this refinancing will provide you with more flexibility in terms of how you handle your debt.
That’s not what refinancing does.
It actually gets you into even more debt, which you may be able to use as leverage in your case.
If you’ve used a finance broker, understand that this is a person who’s supposed to act in your best interests. If refinancing isn’t aligned to your purpose, which is to clear your debt, there’s a possible loophole for you to use.
Brokers can get penalised if they don’t act in the best interests of their clients. You may be able to use this as leverage to open negotiations relating to your debt.
Tip #5 – Use Non-Disclosure Agreement to Your Advantage
Finance brokers also have to provide certain non-disclosures agreements according to the National Credit Code.
They have to provide you with a credit guide that tells you:
- The entity providing the loan.
- Who the broker is.
- How the broker fits in as an intermediary.
- The terms of the loan contract.
There are many other things that the broker needs to do to stay compliant.
A surprising number of brokers fail to provide full information to borrowers. Again, you can use this as leverage. You may be able to use any form of non-disclosure of something that you need to know to open negotiations.
Tip #6 – Check If A Debt Is Statute Barred
There is a statute of limitations relating to debt in Australia.
If you haven’t made any payments for six years, debt collectors cannot harass you anymore. Despite this, so many people receiving collection letters and requests after that statute expires.
For example, you may have a debt with a major lender. If you stop making repayments, that lender may sell the debt to a debt buying agency. That agency will then chase you for the repayments.
If you still don’t make repayments, they’ll sell the debt off to another agency for pennies on the dollar.
This cycle can continue even when the statute runs out. What often happens is that these agencies take a chance on you not knowing about the statute. They’ll continue chasing after that six years even though they have no legal right to.
If you have such a debt that you’re still receiving letters about, just know that you’re under no legal obligation to repay it.
Tip #7 – Changes in Circumstances May Benefit You
Often, people find themselves over-indebted because of a change in their circumstances.
For example, you may lose a job, which leaves you unable to service the loan. You may get a divorce, which can wreak havoc with your financial situation.
If something’s changed since you took out the loan, you may be able to leverage those changes in circumstance. If nothing else, they open the door to negotiation.
It’s also worth checking what the lender knew about you when they allowed you to borrow the money. There are certain bars that you need to meet to be a suitable lender. If you didn’t
quite reach those bars and the lender finessed their way into giving you the loan, the onus is on them to fix it.
Relieve Your Debt Stress
There are options open to you if you’re struggling with debt.
Even if you don’t feel like you’re struggling, these tips may help you to clear a debt that you don’t need to have.
If you want to learn how to get out of debt and avoid bankruptcy by dealing with creditors and debt collectors, you can book an appointment with one of our debt specialists now.
Lawyer, Asset Protection Specialist and Property Educator
Dominique Grubisa is a practising legal practitioner with over 22 years of legal and commercial experience. She is a property investor and developer, an entrepreneur with businesses in Australia and Southeast Asia, a speaker, educator, writer and published author. You may contact Dominique at firstname.lastname@example.org
This column has been written for general information purposes only. It is not intended as legal, financial or investment advice and should not be construed or relied on as such.