State of Play: The World of Debt – A Reprieve?

Dominique Grubi…: Hi there, and welcome to our State of Play. So today let’s talk a bit about debt. The world of debt has been at least given a small reprieve with an announcement yesterday from the Australian Banking Association that they’re going to extend the holiday, or the deferral period of loans, for perhaps another four months for some borrowers. And this is kind of welcomed news because everyone was a bit worried collectively because many people are on JobKeeper. So up to 38% of people receiving JobKeeper said it didn’t even cover their day-to-day bills, let alone their mortgages, and other things that they just put on hold, and they’d kick the can down the road. And secondly, 58% of people with mortgages, mortgage AUS were really, really worried about the future, and how they’d make their payments, and many of them were looking to sell their properties.

So this whole idea, and we talked about it on Tuesday, of the world falling off a cliff comes September, early October, is still in play, but one of the unknown ones was what the banks would do. So the banks have now come out and said that for business debt, they’re going to do exactly the same as housing debt. So in consultation between the Australian Banking Association, APRA, and ASIC, they talked about how they’d treat clients at the end of the six months. So come October, a lot of clients are going to be required to pay their mortgages again, and pay debts, and pay their loans that they’ve had deferred. What’s going to happen then?

So they’ve said that everyone’s eligible for another four months. Now it’s not automatic. You don’t just put your hand up and say, “I want another four months.” The first deferral, they basically allowed one lender. One of the major four, just wrote to everyone and said, “Okay, you can get a deferral,” rather than having, they just weren’t equipped. Now they’ve had a little bit of time to hire people, train them and deal with this influx. And they’ve said, “okay, we’re going to get on the front foot here.” So, it’s an initiative that we’ve decided that for many people, we will grant up to another four months. So they’re starting to ring people now before October, and they’re saying to them, “where are you up to?” They’re trying to get people to start paying again. They’re assessing, reassessing people’s situations, so they may be able to restructure or vary their loans if they’re unable to pay, come end of September, early October.

Some of the things they’ve looked at doing is extending the loan. So if it’s a 20 year mortgage, make it a 35 year mortgage, or whatever. Case by case, they’ll look at it, and then spread the interest payments over a longer period of time, so that the repayments are less. The other thing that they’ll do is convert from principal and interest just to interest only, so the repayments are smaller, and they can go in a holding pattern. And consolidating debt, so taking credit card debt and putting it on a mortgage where the interest rates are lower and refining things like that. So they’re looking at options to help people trade through this.

But as I said, it’s not just the case that you can ask and receive another four months. So APRA was quite worried about that, in fact APRA said, “what is going to happen? We can’t just keep people alive on life support when they just can’t afford, and there’s no light at the end of the tunnel. It’s unfair to dig people into a massive hole of debt where there’s no way that they’ll ever repay it.” So you can’t just as a blanket rule, as lenders, kick the can down the road and tell everyone that they don’t have to pay their debt. So banks are trying to walk a fine line between what’s responsible lending, and getting people into a lot more trouble by doing nothing, and delaying their pain. Because its kind of better for their balance sheets, not to go out and repossess houses, and have a whole lot of delinquent debt. So if they can legally sort of say on their books, “Oh, no, no, it’s not delinquent, it’s just that we’ve deferred it because of COVID, then they don’t have to face their own day of reckoning.”

But the other thing that’s happening is that they’ve also given people a reprieve, when it comes to credit reporting. So just because you defer your repayments, and you’ve been impacted by COVID and the aftermath, they won’t mark your credit report. So, they won’t mark you as someone who hasn’t paid or who’s applied for a deferral. They’ll put you through their hardship process, but without noting anything on your credit report. So remember since September last year we had comprehensive credit reporting. So thanks report, every month that you pay your loan, and if you miss a payment, then they report that too. So the whole thing’s transparent and anyone can see how you pay your debts, and what you’ve done. And if you miss a repayment, then they get a black mark on your credit score, and it affects your borrowing capacity. So if you’re granted a deferral period, or you’re on one, and it’s further extended, it won’t affect your credit report at all, which is good news. It doesn’t mean that we out of the woods of debt yet.

We talked earlier this week about the Deloitte report, and a lot of economists, and even the government itself say, we’re going to have to do something come end of September, because everyone’s going to fall in a heap, If we just withdraw government stimulus, withdraw JobKeeper, JobSeeker, and people don’t have any money. So they’ll have to have a contingency plan. But the other thing that they haven’t mentioned that’s built up ahead of steam and the flood gates will open come September is with business debt and business loans, because we’ve had insolvency laws changed.

So they brought in temporary Corona virus laws that were kind of self springing. In other words, they don’t have to change the law. They just brought in laws that said for a six month period, we’ll stop applications for bankruptcies, and winding up of companies, liquidation. So that meant that there wouldn’t be this big rush of insolvencies in the legal system and in the courts. So they did that and that’s going to end. So it means that a lot of creditors, a lot of businesses, people who haven’t been paying money or people that may be insolvent. Remember the definition of insolvency is that you’re unable to pay your debts as in when they fall due. So if I’ve got a mortgage due on Tuesday, and I can’t pay it, because I just don’t have money, then arguably, technically, I may be insolvent.

So the issue there also is that a lot of business and a lot of contracts in business, for example, supplier contracts have a term in them known in law as an ipso facto clause. So it’s Latin, but it basically means that if you’re insolvent, then contracts can be terminated. So a lot of businesses may, there’s going to be a whole lot of contracts falling over, and people rushing to court come September, because of insolvencies, trading insolvent, and springing ipso facto clauses with people terminating contracts. So in other words, if I’ve got a contract to supply you, and you are insolvent, then I can terminate that contract and pull back my supplies, and your business will fall over. So there’s going to be a whole lot of mess come September, October.

But, and the market kind of knows that. So when the banks announced that they were deferring loans yesterday, share prices of banks fell. Now, that’s going to be volatility. We’re going to see up and down with that. That means there’s a lot of uncertainty in the market. People don’t know what it means. Sometimes when bank shares fall too far, the market will say, “Oh, well, it can’t be that bad, the banks are solvent,” and they’ll start buying in again, so the price will go up. But at the end of the day, people are scared and people don’t know. So the market’s starting to worry about what it means for banks. If banks earn their money from people making interest repayments, and people aren’t making them, because they don’t have money, because they’re on JobKeeper and that’s going to come to an end, and businesses are going belly up because insolvency reprieves have come to an end, and ipso facto clauses are springing up and contracts are being withdrawn, then there is going to be trouble, and that’s what the market’s scenting.

CBA, Australia’s biggest bank, has said that 20% of people on deferrals have started paying again. So its a knee jerk reaction, they may have deferred, but then they’ve gone, you know what, it’s not so bad. I didn’t lose my job, I’ll commence paying, because there’s no sense kicking the can down the road with debt. I’m just going to have to face the problem one day, debt doesn’t go away. So best to just keep paying and stay on top of it. But it does mean, what he hasn’t said, he said, “Oh, the good news is 20% started paying, but banking’s all about the downside, looking at the downside, what about the 80% who are still deferred?” So that’s over 100,000 loans, and APRA have said to the banks, you can’t do this forever. So APRA has put a deadline on it. 31st of March 2021. They’ve said banks can’t defer any more beyond that.

So people have a reprieve of up to four months to get their house in order, to get things happening, but they won’t get beyond March 2021, APRA have said, because you just can’t keep deferring debt. It snowballs, and then it just gets a whole lot worse. So banks are on the front foot, ringing their customers. And obviously banks have to reveal in terms of public companies, they give their numbers and their reporting in August. So next month we’ll know the true damage and where it lies.

So Anna Bligh, ex Premier of Queensland, but also Head of the Australian Banking Association, said, “it’s a distressing time for many Australians. Over 800,000 people have deferred their loan repayments in the crisis. To meet the demand, banks have put 5,000 extra staff on, but be patient with them.” “The next phase to stop everyone falling off a cliff for massive repossessions is, and keeping our property market propped up, which is in the bank’s best interest, and Australians, is to give people support beyond September, and banks are doing their best to support Australia.”

And the RBA, Philip Lowe, Governor of the Reserve Bank, in his interest rate decision on Tuesday. So remember the first Tuesday of every month, the reserve bank decides what it’s doing with monetary policy. That’s interest rates on the price of money. So interest rates are historically low at 0.25%. And as predicted Philip Lowe said, “we won’t ever go to zero rates.” So rates stayed on hold at 0.25%, but it’s interesting what he said about the economy. He said “not withstanding the signs of gradual improvement, the nature and speed of the economic recovery is uncertain.” Especially with what’s happening in Victoria. Uncertainty about the health situation, the future of the economy and things like that are making households and businesses cautious, and that means they’re not spending. So he says the pandemic is prompting firms to consider their models. Some firms are hiring more people others are laying off people. So it’s a balancing act. And he said, “everything that we’re doing as a reserve bank with monetary policy and what the government are doing with fiscal policy is necessary. And it is likely that fiscal and monetary support will be required for some time.”

So well into the future, the government is going to have spending initiatives, things like JobKeeper, or substitutes are more tailored, but they won’t be able to just go, okay, well over to you now, sink or swim. And the reserve bank similarly, won’t be raising rates for a few years. So if you’re wondering, do I fix or not fix, maybe take that into account on what’s said, or not said in the media statement from the reserve bank.

What does it mean for you, if you’ve got niggly debt and you can afford it, but you’d rather not pay it and hey, that’s all of us. Or if you are worried about debt and, to the extreme of drowning in debt, either way, if you’ve got any debt at all at the moment, now is the time to act. Now is the time where they’re negotiable, and now’s the time where you can cut a deal. So I’ve actually got Alicia here from our debt management team. Come on in Alicia. And Alicia’s background, you want to share where you’ve come from?

Alicia Houston: Sure, yeah, I’ve spent the last 10 years in debt collection. Some would call it the darker side. So it’s fun kind of coming into debt management, helping people out has been great. And especially over the last few months, it’s extremely interesting to know what the banks are doing, and all of the lenders, and the credit debt collection companies, and that kind of thing.

Dominique Grubi…: Alicia heads up our DGI debt management team and she, as head of that department, I wanted someone who’d come from the other side because they know what deals banks would do. They know the right buttons to press they know exactly what was what. So we’ve also got Alana on the line. Hi there, Alana.

Alana Jones: Hello.

Dominique Grubi…: So some of you may know Alana from our community, but she’s also one of our debt negotiators. And Just wanted to give you an idea of the sort of things that are happening out there. So I asked Alana, and Alicia to give us some ideas of some deals that are going through at the moment in a COVID world, and what it means, and what they’re doing. So this is one of our debt management clients, Julian. We’ve tweaked his name a bit for privacy reasons but Alana, I think that’s one of your clients, if you want to talk us through that.

Alana Jones: Yes, it is. This is one of mine that we’ve just got his result for, quite recently, and it was quite a good one. It’s a bit of a long standing issue that they had, the business stopped trading as it says, a couple of years ago due to a business partner breakdown. So they went to the bank to restructure some of their debt. The bank split their facility into two different facilities, and then they came away and that was done and they would, pay what they can for a few years, but never really getting ahead. So then they came to us, and we investigated it, discussed what had happened, the advice they got, what the bank had done. And that resulted in us lodging a maladministration complaint with the bank and investigating how the accounts were set up. The end result was both based on what the bank did, but also their current circumstances and going forward into what they could do, and the bank actually ends up waiving that debt completely. So that was a fantastic outcome for that one.

Dominique Grubi…: Okay. What sort of buttons do you push? I might direct this one to you, Alicia. What sort of things are possible, and what do banks consider? For example, this one, maladministration. What’s that mean?

Alicia Houston: Yeah. So I guess in terms of lending practice, and it’s a very heavily regulated industry. So there’s so many things that they must do to comply with the law, and I guess to our benefit, a lot of the time they miss those things. It’s very stringent, there’s documents that must be produced, and held for a long period of time, and then produced within a timely manner when requested. There’s lots of different little things that, we know what to ask for, we know what to look for when we receive the documents, and that’s where we can kind of build some leverage. That is one way to go about it.

Dominique Grubi…: Okay. And I’m going to let Kevin look at another one. So that was a business debt situation, and the way that you presented it, and argued it, the bank in that situation went, yeah. Okay. We won’t pursue you.

Alicia Houston: Yeah. That’s right. And sometimes we’re able to get a great outcome because the bank can say, we know the questions to ask. They don’t want to give us that information because if they did, then they know that they’ll be in big trouble if we took it to AFCA. So it happens, it’s not entirely a unicorn and never to be seen, because it does happen. Maybe not so frequently are they waiving debt, but a lot of the time they are making mistakes that they definitely don’t want us to know about. And if you know what questions to ask, then you absolutely can get those outcomes.

Dominique Grubi…: Okay. Let’s have a look at another one. So this is carrying credit card debt. If you’re carrying credit card debt, bad, bad debt, you kind of already know that, but you think you don’t have an option. So let’s have a look at some credit card debt situation. So this client Anne, has got six credit cards. Alana, do you want to talk us through this one?

Alana Jones: Yes. So this client actually came to us to negotiate four credit cards, but they’ve got six in total that they have, and the mortgage. So what we did, instead of just looking at what we wanted to negotiate for them, and get some results on, we looked at the whole picture. And by getting what we can on those ones that they want to keep open, under some temporary hardship arrangements, we’ve been able to free up some cashflow to put us in more powerful standing when we go into negotiating the ones that we want to get an actual negotiation on. So it’s quite holistic. So we actually added some accounts because we just wanted to get some temporary solutions on them to free up the cash in that mortgage to then build a bit of a war chest, go towards some settlements.

We’ve started to get some really good results for her. Two of the credit cards that we’re negotiating are actually settled and both for 50% discounts, and one of them is actually on a 60 month payment arrangement. So this is not based on compliance in the bank breaching responsible lending guidelines. This is based on the customer situation and the story behind them. So the results that we’re able to get are so targeted based on the customer’s story, their circumstances, their current position and what their situation was at the time of the debt as well, to look at those different things.

Dominique Grubi…: So working through that, and that’s often the case clients say, “Oh, well, hang on a minute, I still need a credit card, and I still have to use my debt, and I still want to draw down on my mortgage.” So have to look at a holistic longer term plan. So it was taking advantage of deferrals and other things that we could do, getting a pause, keeping cash flow then, as Alana said, but still not claiming hardship on one credit card, so that they could still have credit to draw down on and use.

Alana Jones: Yeah, that’s right. We did an arrangement with the ones they wanted to keep open, that wasn’t going to impact that long-term, and that’s helped us with the overall strategies.

Dominique Grubi…: So you’re jockeying into position. I know, personally, I found out the hard way, like everything I do trial and error. So when I was in debt, I rang up all the credit providers, and I was trying to cut deals, and then I’d say something like, “Oh, well I’ve got X dollars, so I can give it to you, or I can give it to someone else.” And then they go, “Oh, well, if you’ve got X dollars, why don’t you go on a payment plan, and give everybody something, and do it over time.” And they kind of started getting me on the back foot. They cross examined me, and you know what they say, a lawyer who acts for themselves, as a full for a client. I didn’t have the objectivity to go in, and I didn’t tell them things that I should have told them, and I told them things that I shouldn’t have. And the whole thing I had to pull it apart by trial and error, which is why you should just have a third party in an ideal situation being the go between for you.

And also I know that with Alicia’s experience, she will say, “Oh, they’ll go for this, or they won’t go for that, but I know this lender in particular.” Especially dealing with hundreds and hundreds of them, we get to know what lenders have what policies in place, and it changes, doesn’t it?

Alicia Houston: Yeah, it sure does. We also know that the age of the debt in terms of particular lenders, when it will be sold, how much it will be sold for-

Dominique Grubi…: Do you want just explain that, selling debt?

Alicia Houston: Yeah. So for the most part, the banks, or any sort of lender or credit provider, will let the debt get to a certain delinquency, which is normally around about 180 days. At the 180 days, they kind of bundle them all up. So everything that’s delinquent and old and is decreasing in value for the bank will then be sold off to certain debt collection agencies and third parties. Now, depending on whether that’s a credit card, whether it’s a personal loan, whether it’s a secured debt, they all sell for different amounts. Because of my recent experience in debt collection, I have a pretty good understanding of how much they’re sold when they’re sold, and so then I know the value from the debt collection point of view as well.

Dominique Grubi…: So Alicia will say, for example, credit card or whoever they would have bought this debt for 18 cents on the dollar, so if we offer them 25 cents on the dollar, or whatever, or they would prefer, actually getting their company ready to sell, so they’d like to have a book so we can pay this off over 60 months, or who do I ask for what?. Then like I said, if you’ve heard me talk about mortgage brokers, I’ll say, all the mortgage broker knows what the lenders policies are, and what lender to best send you to, and what to ask for, and what to present, and same thing here. So let’s have another look here, Dick situation, Alana. So that was again, credit card negotiation?

Alana Jones: Yeah. So he had two credit cards that were obviously quite old and [inaudible] quite a while ago.

Dominique Grubi…: And they’d been sold off. They’re the ones that Alicia’s talking about. They’d sold it off to a debt buyer. So secondary debt buyers are firms that buy other debt for cents on the dollar, and if they can collect on it for more than they paid for it, that’s their profit.

Alana Jones: Yeah, that’s right. And they’d been with these second tier lenders, or the purchasers, sorry, for about five years. So what we did was actually looking to what had happened since they took over the account. And we, as relations touched on, we know the documents to ask for, we know what to look for. And when we received the paperwork for these accounts, he had been making payments for quite some time at quite a minimal payment, and that will continue to charge interest. So it was an arrangement that he would never be able to get ahead of, and never get on top of the debt. And that’s something that we can use as an unsustainable arrangement. And we were able to use that to actually negotiate the removal of all the interests that had been charged since they had it, and whack off a lot of the current balance, so that he was only then liable for the principal, which we’ve arranged on a low interest, sorry, a low payment nil interest arrangement going forward.

Dominique Grubi…: So Alana, in other words, they’d saddled him on a payment plan with debt that didn’t even cover the interest. So till the day he died, forever, he just had that automatically debited from his account. He was tethered to debt for life. And debt shouldn’t be that, it should be that you eventually, even if it’s like a mortgage and it’s 20 or 30 years time, that you all eventually be debt free. So they had to revise all of that and re do the accounting again, so that he will ultimately come out of that. So wiped a lot of that debt off.

Alana Jones: Yeah.

Dominique Grubi…: Good job. And a final one here, Janine. So this was where you could rely on a different story and a different circumstances, but you could rely here on medical issues, and doctor’s reports, and that sort of thing. So, Alana, if you want to talk us through that one.

Alana Jones: Yeah. Quite a lot of trauma in her story. So I won’t go too much into her personal situation of what happened. We started looking at some compliance things with her, but we also realized that that wasn’t the best track to get the results for her. So we presented her story, and her situation to the banks with their obligation, and what she has, what money she had coming in. And we were able to get all of that waived based on her story, and her circumstances, by presenting it right, and then using that leverage from other creditors once they’ve been accepted.

Dominique Grubi…: Fantastic. So in terms of what lenders are doing now, what’s the appetite for cutting a deal, Alicia?

Alicia Houston: Yeah. I mean, it’s good, if you know how to frame it up. At the moment, everyone is kind of, COVID crazy, and so a lot of the reprieve that the banks are giving is an automatic response. Alana and I were talking yesterday morning, actually about exactly this. Will we get a story together, frame it up, send it off. And sometimes they’ll come back even still with a generic response saying, “Oh, we’ll give you a three month moratorium.” So we have to push a little bit harder.

Dominique Grubi…: So in other words, when you said a story, frame it up, you’re saying, I’ll give you a cent on the dollar, or let’s do a payment plan, or let’s do something and they’ve just come back saying, dear John take another three months? And you’ve gone no, I didn’t ask for that.

Alicia Houston: Yeah, that’s right. Because in the long-term it’s not going to help our client. And framing it up is the story. So not only the offer, but how we present that to the creditor, is extremely important because they will, like I said, either come back for a moratorium, or say no, or they’ll pick at little things that they will ask for. So, they want to know all of the information. We know where to hold back and where to be forthcoming, because they can use it against you as you’ve known in the past as well. So, because of our experience, and we’re talking about these every single day, at the moment, the main thing that we’re finding is a generic, we will give you a moratorium, everything is going to be all better in a few months, and then you can pay us back.

So it’s important that we’re making sure that what we’re putting forward is explaining the situation, putting forward a good offer. Sometimes we need to find a sweet spot, but obviously we’ll go in lower than what we want to pay, knowing that they will try and negotiate us up a little bit. And as you can see from a couple of the case studies that Alana’s just gone through, and there are only a few of just hers over the last couple of weeks that we’ve seen is payouts of 20 cents in the dollar, payout of even less than that sometimes, which is really good. So they are absolutely negotiable. It’s a great time.

Dominique Grubi…: Yeah, everything’s negotiable, but if you don’t ask, you don’t get. So if you’re carrying any debt at all, even if you can afford it, now is the time to ask for a deal, because now’s the time that they’re cutting deals. And if you’re not sure, and you’re watching this, then you can book a strategy session with one of our team to just ask. If you don’t ask the question, you’ll never ever know. There’s a link there in the description and in the comment section. If you go to that link, you can book an appointment with one of our team and just ask. This is my situation, I’ve got this credit card, I’ve got this, I’ve got this, is it possible to do anything? And guarantee, it will be. Don’t ever pay full freight, especially in a disruptive change time as we’re going through now, when they’re all cutting deals, you never ever pay the full weight of it. Any last words or advice for our listeners today? Our viewers.

Alicia Houston: Yeah, I’ll jump in. I guess one thing that you mentioned earlier Dom, was that the banks have had to hire 5,000 new staff, to try and tackle the incoming calls and the hardship applications that they’re receiving. So a lot of the time, the people on the phones like doing this yourself is difficult. Just because you’re getting someone on the phone who’s maybe only been doing, working for the bank for a couple of months, they don’t know the industry, they don’t understand how to interpret what information you’re giving them. So doing it yourself is difficult, but make sure that you give us a call if you need to, because we’ll be able to at least tell you if we can help.

Dominique Grubi…: Yeah. And one other situation I might throw this one to you, Alana. Is that often people go, “Oh, well, I’ve got all my banking with this one bank, and I don’t want to upset them, or I don’t want to burn any bridges.” Is that something that you see and what do you do then?

Alana Jones: Yeah, absolutely does happen, and sometimes you need to be strategic. If we are looking at restructuring some debt, we need to do that before we put some arrangements in place maybe. Because as you said before, if you do it yourself you don’t know what to say. Once you said something to a creditor, you can’t take it back. They have notes. So it was really hard to go and renegotiate different things, or to say a different story once you’ve presented it. So it’s really important to frame that up the right way and to get all the ducks in a row. Everyone’s situation is different. The outcomes we’re able to achieve are so different for different people based on the story of the debt, your own story, as well as circumstances around their compliance. So it’s such a combined journey.

Dominique Grubi…: Awesome. Well, thank you ladies, both, so much for sharing today. For those of you heading over to that link, and if you’re watching the recording, we’ve opened up enough space in our team’s diaries, but please don’t take an appointment if you’re not going to show up, or if you’re not serious about it, because it is a commitment of their time. And they spend a lot of time, even a lot of time just holding on phones to banks. So to free up space, to support people is a big deal, and they’re there for you, and that the spaces will fill up fast.

So the other thing to remember is tell you friends, your family, tune in, make sure you tag them in, in the comment section and also follow us on YouTube and hit the bell to subscribe. Make sure you like us. And you’ll also be notified when we have upcoming content coming out. In the meantime, stay safe, take care, and we look forward to helping some of you chip away a debt, or hopefully just obliviate it altogether. We’ll talk soon in our next State of Play.