State of Play: What’s Happening In The World Of Debt

Dominique Grubi…: Hi there and welcome to our State of Play. That’s right, new week, new format. So instead of a daily huddle, we’re now coming to you twice a week because as of Friday The Prime Minister announced a three-stage approach where we’re coming out of our economic shutdown. So twice a week, I’m going to come to you with your most pressing issues, burning questions and more recently as the world over it’s been about debt. So I’ve invited Mayank who’s our general counsel and head of our legal team to join us today, welcome Mayank.

Mayank Gupta: Welcome. Thanks Dom.

Dominique Grubi…: And Alicia who’s operations manager of DGI Debt Management. Welcome Alicia. So these guys have come from the dark side of debt, the debt collection sort of legal side of the lender fence over to our side, to help people with debt and I’ve headhunted the best of the best because of the current climate.

So as you know, right now we are going from bad to less bad in a quarantine sense and in a sense of the virus flattening that curve, and we’re starting to get back to the new normal, and at last the government has mapped a way out of that. Now it’s going to be different how it comes into play and it varies state by state, but there’s some light at the end of the tunnel.

So before we were literally day-to-day, what’s going to happen next, what’s it going to mean? We were watching the numbers and the data, and now we’ve kind of adjusted, we’ve bottomed out and it’s a long road back. So today Josh Frydenberg, the treasurer gave a speech and he said that everyone understands that the government is not this magic money tree. They’ve put $320 billion into the economy. Nearly a million people have lost their jobs. So there’s a sharp impact there counteracted by swift government action, which is a good thing and people aren’t really feeling the pain yet.

On top of that, banks have just paused $200 billion worth of loan repayments. So 20 billion of that was last week alone and what it means is that nearly 650,000 loans are just paused and all of those nearly 350,000 are residential mortgages. So it means that some of us may be in a bit of a calm before a storm. The knock-on effect of the pain may not be felt for several months, but it’s really important to act now and that’s what I asked Mayank and Alicia to come on to live today to talk about why it’s important to act swiftly now with any debts.

They needn’t be delinquent debts or bad debt but now is a real window of opportunity with the state of play, to change your debt situation before things go on to a whole different level, because when the job keeper runs out, when these pauses of loans run out, we’re delaying inevitable pain and now is the time when lenders are motivated and people you owe money to will cut a deal with you. So first of all Mayank do you want to just explain a bit about your background and where you come from so we can understand the insider secrets you’ll be sharing with us.

Mayank Gupta: Sure. So I’ve spent vast majority of my career being a partner at various international law firms in Sydney, Hong Kong and in London and previously joining DGI I was the general counsel of a major commercial asset financier here in Australia. So I’ve got a significant amount of experience dealing with both on the creditors side and also with debtors.

Dominique Grubi…: Fantastic. Thank you and Alicia, your background.

Alicia Houston: I’ve spent the last 10 years almost in debt collection and debt management. So I was operations manager for a large debt collection company. So purchasing debt and working on behalf of lenders, banks and government bodies and everything collecting debt. So I do know how they feel the pressure in these kinds of times, how they react to certain things so…

Dominique Grubi…: So yeah, I wanted to get this collective IQ for our community because there’s a lot happening at the moment and in order to win in this game we have to know, we have to get inside the heads of creditors, people we owe money to and that sort of thing. So guys, what I wanted to know is first of all, what are you seeing in terms of clients these days because this is widespread, this is a great leveler, COVID-19 it’s not just for the downtrodden end of town, big titans of industry and big players have failed through no fault of their own often. So what sort of people now struggling or may soon struggle if they don’t get their house in order now?

Alicia Houston: Sure. I suppose I’ll start, I’ve got quite a few. I guess we’ve had debt management clients for a long time and so people have already been in financial hardship and COVID and the current environment has just exasperated their situation, made things a lot worse that people are losing their job, some people haven’t been eligible for the government grants and whatnot so they’re sinking further and further which is terrible news. There’s also some people who are just being effected recently. They’ve always been able to pay all of their debts on time, all of their deals and everything and now just starting to really feel the pinch when that cash flow is tightening a little bit. So they’re probably two of the main people that are experiencing some financial difficulties. There is-

Dominique Grubi…: So chronic debt and then just being blindsided with job loss or business loss or something because of restrictions.

Mayank Gupta: Yeah, absolutely. We also have some customers who probably aren’t experiencing so much financial difficulty but do want to take advantage of the current interest rates dropping and being at an all time low so but may have had debts in the past which has impacted their credit file and things like that. So we’ve got some of those customers as well who just want to clear that up to take advantage of the situation.

Dominique Grubi…: Mayank, from a legal perspective.

Mayank Gupta: Yeah, look very similar in terms of what Alicia said, the clientele both who are dealing with their first time ever where they’ve been completely blindsided by the events of COVID-19. Historically they’ve been really good payers being able to have surplus cash et cetera, and suddenly they’ve seen more than 40, 50% of revenues hit because of the current pandemic and then they’re trying to deal with existing creditors, credit card debt, the landlords, franchise owes, ATO liabilities et cetera. So there’s a range of streams of demands being requested but again, working with them, working with the various counterparties, we’ve been able to find very useful solutions.

Dominique Grubi…: So the reason I wanted to talk about this and debt is kind of like a taboo subject that people don’t talk about, but it’s far more acceptable now because it’s affecting so many people and there’s no stigma because often it’s not their fault and they’ve just been totally put into a tailspin by this. It’s going to get worse [OECD] stimulus packages are going to run out, loan holidays are going to run out, debts need to be repaid unless you have some strategy and you can take advantage of it now.

So the Roy Morgan poll has come out about consumer and business confidence. It’s at an all time low. So since records were kept, it’s never been this low. It’s normally hundred and something, it’s now down to 76.9. So in the last month it’s dropped another 19%. Most people surveyed feel that it’s going to be a good 12 months before they can even think of stabilizing.

So we haven’t seen the worst of this yet, even though it feels like, “Oh, we’re out of lockdown, it’s all over.” There’s going to be a massive tale in this. So we have had to change our legal commercial debt management energies from one in an environment of post banking royal commission, where we could claim compliance or breaches of the law, the bank then dotted their I’s or crossed their T’s because they were under the microscope to do the right thing by clients.

We heard last week that parliament had actually deferred bills that were due to be passed later this year as a result of recommendations of the Royal Banking Commission. So now they’ve said, “Look, the banks are under enough stress and under enough pressure, interest rates are really low. They’re having to forgive loan repayments. They’re having to lend more money and everyone’s hurting and we have to give our financial system a break.” So that’s what the current environment is. In light of everything that we know and everything you guys know from the other side, from the lender side, what strategies are working right now with debt?

Mayank Gupta: So Dom, just in relation to that very point, I think it’s absolutely essential to confront the debt issues, the credit issues that people might be facing, because I think the window for discussion for taking a head on approach is right now and the reason for that is threefold. One is creditors at the moment are caught on the hop, they’re being very reactive to a lot of the hardship requests and applications because their systems have never seen anything like it. This is completely unprecedented.

Typically or historically you would maybe have four or five hardship applications a week at max, but I know institutions where they’re getting over 300 applications a day, and that’s been certainly over the course of March and April. So institutions are certainly not prepared for it and they’re just starting to get on top of this thing. So-

Dominique Grubi…: And how do they work [inaudible] if they have committees or something?

Mayank Gupta: They have credit committees where they go through and analyze the hardships, et cetera, and ordinarily they’d be asking for a lot more detail, a lot more paperwork in relation to your future cash flows sort of budgets, PnLs et cetera, but given the volume of applications coming through, they just are not in a position to analyze all of that so that’s-

Dominique Grubi…: And they probably know too that borrowers can’t really predict cashflow.

Mayank Gupta: Absolutely. Yeah. Exactly, exactly right. So the usual request of 10 or 12 documentations, that’s just not going to cut it.

Dominique Grubi…: So the scrutiny is not there. They’re kind of rubber stamping it.

Mayank Gupta: Correct. And number two, related to that very point is the reputational issues. You don’t want to be the creditor that is sending out default notices, demand letters, or making life difficult for borrowers in this environment. You don’t want your name to be splashed across the front pages of the Daily Telegraph or ACA or et cetera. We saw that with ME Bank recently and that negative publicity was absolutely brutal for that institution and they’ve had to reverse their policies, and so similarly, a lot of other institutions are very sensitive to that reputational issue.

Number three, the Morrison Government has instituted a number of sort of moratorium periods for debtors. So for example, in terms of demand or responding to statutory demands, the typical period was 21 days, that’s been extended to at least six months, similarly with relation to insolvencies and bankruptcies, the moratorium period for that has been extended to at least six months. So in terms of creditors being able to take any sort of enforcement action et cetera, their hands are fairly well tied at the moment. So this again gives good leverage to debtors looking to negotiate their debt position.

Dominique Grubi…: So they got no teeth at the moment anyway by law. And I think also Alicia with comprehensive credit reporting that came in last year they would report late payments. They’ve now said they can’t do that while this is going on.

Alicia Houston: Yeah, that’s right. The comprehensive credit reporting is only fairly recent anyway, but it won’t impact your score at all. When we’re advising that the consumer is currently experiencing some difficulties they are not able to mark that as a bad experience on your credit fall. I mean, they’d be silly to really anyway because of all of the points that Mayank just mentioned and those banks and even debt purchases and the other debt collection agencies are actually quite sensitive about those topics as well.

Mayank Gupta: Yeah.

Dominique Grubi…: So what’s the overarching strategy in the current climate? What are lenders doing? What are they saying?

Alicia Houston: Yeah. I mean, what I’m saying and it’s changing actually quite rapidly. In the beginning it was sort of clients experiencing some difficulties, they would very quickly respond with, “Here’s the moratorium.” and initially it was for six months. So everyone was, “Let’s just give everyone a six month moratorium.” They weren’t probably varying the contracts properly.

They already have timed that up so we’re starting to see a three month moratorium which will extend then over the potential to extend for another three months but the standard template letter that they sending back doesn’t include all of the little bits and pieces that we’re keeping an eye out for which is interest freezes some are coming back just with a little bit more scrutiny.

They’re a little bit tighter at the moment so like I said, it’s changing rapidly, but every day my team have a huddle and we talk about those things that we’ve seen from the previous day. Some of the collection companies in particular are getting creative, they would be feeling that the amount of hardship for debt collection people are already in hardship if they account has been sold off to them.

So the amount of people not paying would be impacting them significantly and so then they’re getting a bit creative offering dollar for dollar matches, which is essentially a 50% off discount, but if you can pay $20 they will reverse $20 worth of debt from the balance. So I think that whilst they are reacting quickly in terms of not wanting to be on the front page, they’re also trying to still do what they can to get some money in the door.

Dominique Grubi…: So basically, you can get more than what they’re offering if you know to ask for it.

Alicia Houston: Absolutely.

Dominique Grubi…: Yeah.

Mayank Gupta: Yeah. And I mean, I think over the last couple of days we’ve been trying to negotiate for one particular client he’s got about $100,000 mortgage that’s outstanding plus some franchise payments to be made and we’ve actually gone back to the creditor on the mortgage payments and requested payment or a settlement of 30, 40K and that particular credit is certainly more than happy to entertain that. Whereas six months ago they’d laugh at it and throw the request in the bin, but actually they’re willing to take a hit because they know that this particular client may very likely not get back to their level of business in the next 12 months. So whether it’s insolvency claim down the track or whether they should take a hit and just take what they can now and just quickly settle in.

Dominique Grubi…: So date of release. No data owing we’ll take 30 cents in the dollar. Okay, and not much paperwork or proof required.

Mayank Gupta: No, exactly. That’s exactly right.

Dominique Grubi…: Okay, and in terms of how they work, is there a sweet spot because I know Alicia told me the other day, one thing that we’re seeing is they’re ringing people up and saying, “Just make a small payment, just make a $100 payment and we won’t blacklist your credit file. So they can’t anyway, when you’re claiming hardship, they can’t blacklist you and asking you to pay money or pay a little bit or make a small payment, what are they doing there? Why are they doing that?

Alicia Houston: Well, there’s probably a few different reasons for it. Mayank probably can take this one a little bit. We discussed this morning from a collections point of view, if the account is a certain amount of months or years in arrears it becomes less valuable on their books so they will class debt as an asset and the longer it stays outstanding the less value it is to them.

Dominique Grubi…: So 60 days overdue is quite good, they’ve got good chances of collecting a year overdue is not good.

Mayank Gupta: Yeah. So that exactly it’s a material delinquency and material there’s and this leads on to the fact that over the next 6, 12 months a lot of the institutions who’ve already significantly raised the repayment charges, so Westpac and CBA I think increased theirs by six or seven times what they normally do in terms of repayments. What they’re looking to do there is-

Dominique Grubi…: That’s like default on penalty charges?

Mayank Gupta: Correct. Yeah. Write offs, right? And what they’re looking to do is effectively sell that book to secondary buyers to get it off-

Dominique Grubi…: So they are giving up so now on collections.

Mayank Gupta: Yeah, exactly. To get it off their books and let someone else deal with it. To outsource that to third parties and so when a third party comes to acquire it, as Alicia said, when they want to purchase it, they look at when the last payment was made or when the last dealing was done and that obviously the more recent the payment that has a bit more value for the institution selling. So obviously if they’ve asked you to make a $100 payment or $200 payment that’s merely to just ensure that they can easily sell off that debt later. However, the catch there is that you may not be dealing with a reputable or a larger organization. You might be dealing with a hedge fund or some other-

Dominique Grubi…: Secondary debt buyer.

Mayank Gupta: Yeah. Where reputation, because they work under the radar, reputation is not much of an issue so they may be a little bit more aggressive in their pursuit for the debt which comes back to the point that this is a really good time to start negotiating with your primary creditors right now.

Dominique Grubi…: So if we are able to negotiate, is there a sweet spot where the lender would take an offer from us versus selling it off to a secondary debt buyer in your experience?

Alicia Houston: Yes. There is because like Mayank said, basically for the bank when you owe them the money, the more delinquent it becomes the less valuable it is to them. But on the flip side, once they’ve sold it, the newer it is to the collection company or third party debt purchaser, the fresher it is so you kind of go opposite again and the earliest since the purchase it is for them, the more valuable it is.

So the sweet spot is always before it is sold on to a debt purchaser in my opinion, right before or maybe a little bit down the track debt purchases are in some cases a lot more flexible in terms of fees and interest charges and those kinds of things. But at the moment, given the current situation were able to get around that. Also, if you know the industry you know what you’re asking for you know how to pitch the story, they actually are pretty reasonable when it comes to that. So especially in today’s environment.

Dominique Grubi…: What would be a point they’d sell to a debt buyer and at what point would they say, “Look, all right, we’ll just settle it up with you.” as opposed to selling off the debt.

Alicia Houston: Yeah. To sell it off it needs to be a delinquent account or in arrears up to 180 days. So at 180 days in arrears, they will then consider it a write-off and sell it off. Before that though they could be not selling it, but I guess what’s the word I’m looking for-

Dominique Grubi…: Collecting.

Alicia Houston: Yeah. Yeah. Yeah. They will go out to a debt collection company to work on their behalf at that point, they’re also fairly negotiable. They’re paying for someone else to collect on that arrears amount as well and so the window of and the more flexible they are in terms of their settlement offers is usually larger. There’s a couple of things to this though, not everybody has the money just to settle the debt and go out and make a lump sum payment. At the moment I think it’s like Mayank has mentioned, it’s the perfect time but not everyone has the capacity to do that and so thinking of a more longer term solution, the banks are also being a lot more flexible with that as well and not just banks, but all of the lenders and institutions that are collecting on these debts so…

Dominique Grubi…: So renegotiating payment plans, kicking the can down the road.

Alicia Houston: Yeah. I mean in some cases we might and the moratorium is a great thing that’s always for a customer in hardship we can always buy some time, we would want to buy some time so that the bank is then feeling the pain of you not making those payments if you don’t have the money to settle initially.

Dominique Grubi…: And it’s nice getting off my nose, right? Right now let’s just say I’ve been hit but I’m trying to pay my debts, I’m robbing Peter to pay Paul. I’m treading in water, haven’t defaulted on anything yet, but you guys tell me it’s a good time to do something and not to put my head in the sand. But as far as the bank’s concerned, I’m a good payer. So the current climate if I stopped paying, they can’t blacklist me, they can’t hit my credit score so there’s not much they can do and you’re able to get me some relief for hardship.

Alicia Houston: Yeah, that’s right. And so it really depends on everybody’s individual circumstances. Like I said, I’ve got a couple of examples. I’ve got one at the moment that the customer has a five and a half thousand dollars debt. They didn’t have the money to settle it. They could also couldn’t afford the minimum repayments and we’re basically just treading water to get out of it with interest accruing on the account as well. We ended up getting a long-term $50 a month arrangement with no further interest charges. So whilst there might not be immediately a right off of the debt or a forgiveness of a portion of the debt it’s still saving over the long-term more money, more cashflow in the customer’s pocket and also not actually having those interest charges. So every payment that they make comes off the principal and it makes a big difference.

Dominique Grubi…: Yeah. It’s like a 0% interest balance transfer pay down. Yeah. And the other thing I was going to say is just the other thing we’ve seen example, Commonwealth Bank to deal with so many loans nearly a million people, they just sent out an email saying your line’s now being varied, you have a moratorium you only have to pay this, and if you don’t want this you need to opt out. So they’re automatically applying it and they’re not the best terms.

It means people have a longer loan term, they’re actually paying more without knowing it. So just check your situation there’s probably more you could do just because your bank have offered you a deal probably not the best deal that’s possible but it’s what they’ve done as a blanket solution because they were just being hit up with so many claims. So a lot that can be done out there with credit card debt, personal loans, business debt, overdrafts, mortgages, and debts to other parties like the ATO and trade creditors.

So you need to put your hand up though and now is probably the perfect window because all of this will stop as we start to hit rock bottom and climb out and it’s going to hit critical mass in a few months time, but they’re still very negotiable now and now’s the time to seize payment plans. They’ve already stopped six months as Alicia was saying instead well three months and we’ll reassess. They’re not asking for much, they’re rubber stamping things at the moment and I can see we’ve got questions, but we’re out of time today but we might take those questions offline. If you want to ask about your situation or see what’s possible or just check that you got the best deal that’s out there and you’re doing everything within your power you can go to this link here so dgidm.com.au

If you go to that link, we can take it offline. You can talk to the guys and we can just check that you’ve done everything in your power and in the best possible position, either get rid of debt, pay it down, trade through this, whatever the debt may be because we’ve never, ever seen an environment like this when it comes to… We are dealing with treading through difficult situations.

So look forward to connecting with you guys offline if you go to that link and thank you for joining us for our new format of our State of Play, and we’ll do it again at 4:02 on Thursday. So we’re going to do these Tuesdays and Thursdays at 4:02. Hope you’re enjoying the lifting of the restrictions and getting back to normal and we’ll catch up again live at 4:02 this Thursday. Thanks guys.

Mayank Gupta: Thank you.

Alicia Houston: Thanks.