Paying to get out of debt - be careful before handing over money

Over the last 30 years household debt in Australia has skyrocketed, and it's seeing more people turn to 'debt repair' services.

According to a study by AMP/NATSEM, average household debt has soared from about $60,000 in the late 1980s to around $250,000 today.

For many people, a good chunk of household debt is taken up by their home loan. If you can manage the repayments, that’s not a problem - your home will grow in value as the debt is gradually paid off.

However high interest debts and regular bills can quickly mount up, and when that happens it can be tempting to grasp at what appears to be a quick fix solution. That’s exactly what debt repair firms can seem to provide.

These firms offer to help consumers facing financial hardship or who want to clear a history of debt defaults from their credit record. You may come across claims that these firms can 'clean', 'fix', or ‘wash away’ default listings. Others offer to negotiate with creditors and debt collectors.

The thing is, an investigation of the debt repair industry by the government’s money watchdog – ASIC, shows there are issues to be wary of.

ASIC found debt repair firms don’t always spell out their fees and costs clearly. This makes it difficult to assess what you’re getting for your money.

Consumers may face high pressure sales tactics and be asked to pay fees upfront. Most worrying, ASIC noted some debt repair firms had a poor understanding of the relevant law and the consequences of particular strategies. In other words, you could find yourself worse off.

I realise there can be few things more stressful than overwhelming debt. But before turning to a debt repair firm there’s a lot you can do yourself at no cost at all. If you feel your credit record contains information that is wrong or out of date, contact credit reference agencies like Veda or Credit Savvy. You have a right to challenge any incorrect details.

If you’re struggling to meet repayments, a range of financial counselling services and community legal services are available to help at little or no cost. Or, if you have a dispute with a lender, phone company or power provider contact one of the independent ombudsman services before you start handing over cash to a debt management firm.

Paul Clitheroe is a founding director of financial planning firm ipac, Chairman of the Australian Government Financial Literacy Board and chief commentator for Money Magazine.

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© AMP Life Limited. This provides general information and hasn’t taken your circumstances into account. It’s important to consider your particular circumstances before deciding what’s right for you. Although the information is from sources considered reliable, AMP does not guarantee that it is accurate or complete. You should not rely upon it and should seek qualified advice before making any investment decision. Except where liability under any statute cannot be excluded, AMP does not accept any liability (whether under contract, tort or otherwise) for any resulting loss or damage of the reader or any other person.