Trouble with debt? Be careful who you turn to.

If you’re struggling with runaway debt, be careful who you turn to for help. 

There’s no shortage of ‘debt management’ firms promising rapid solutions to overwhelming debt (just Google ‘debt help’ to see what I mean). Their services typically include bankruptcy advice, formal and informal debt agreements and debt consolidation. Others advertise ‘cleaning’, ‘repairing’, or ‘washing away’ default listings on personal credit reports.

For anyone battling high debt this can all sound very appealing. But our money watchdog ASIC has cautioned that debt management firms can pose significant risks to financially distressed consumers.

One of the key issues is that these companies can charge high upfront fees for services that don’t always deliver much value. It may not be clear how much you’ll pay, and ASIC warns “the promise is always more prominent than the price”.

That’s a real worry because people facing spiralling debt can be extremely vulnerable to taking up unsuitable services or become victims of a predatory hard sell.

A number of debt management firms have also been found to gild the lily when it comes to describing exactly what they do and how they can help.

Just this month ASIC cracked down on several companies that had made false and misleading claims. One firm was advertising that its debt agreements were 'Government Approved'. Yes, debt agreements and debt administrators are regulated but that doesn’t mean they’re approved by the government. Another firm’s website featured glowing customer testimonials, which it was unable to substantiate.

These sorts of issues make it worthwhile approaching debt management firms with caution. Sure, some may be highly reputable but you’ll still pay for their services, and that’s money that could potentially be put to better use paying down debt.

The thing is, digging your way out of debt doesn’t have to come with a raft of fees and charges. A national network of financial counselling services is available that offer a free service. The big difference is that they don’t advertise an instant solution because frankly, there is no magic bullet to getting out of debt fast.

If you’re struggling with debt, it’s critical to take early action. Speak to your bank or creditors and explain the situation – many will offer a repayment plan. Talk to the free ombudsman scheme before paying a fee to a debt management firm. And check out the website of Financial Counselling Australia or call the National Debt Hotline on 1800 007 007.  You won’t be offered a quick-fix solution, but you will receive unbiased advice on how to get back on track financially. 

 

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.