Freeing clients from the debt spiral

There is renewed optimism in Australia as we head into a new year and the country opens up to all Australians. Confidence is rising as businesses reopen their doors to customers after extended periods of hibernation, and with border restrictions easing there’s going to be a surge of holiday goers looking to travel this summer.

However, while the future may look bright, brokers must bear in mind that the coronavirus pandemic has battered many of their small-to-medium (SME) and individual clients. It has left many with the prospect of mounting credit card and personal loan debts after 18 months of disruptions, forced closures, and job losses.

While brokers could recommend debt consolidation – where clients refinance their debts into one loan (such as their home loan) – this could extend short-term credit card debts or personal loans over the term of a home loan, which could result in additional interest charges for clients. Moreover, while consolidation would lower repayments, clients would have to leverage equity on their property to do it.

An alternative – but lesser-known route – is debt negotiation. This enables borrowers who are facing substantial financial hardship, and refer them to a debt negotiator, who would review their case and assess whether they are a suitable candidate.

According to Laurence Hugo, director at debt negotiation services provider Credit Mediation Services, debt negotiators are an allied service to brokers, similar to accountants, solicitors, real estate agents, insolvency specialists, and credit repair specialists.

He told The Adviser: “A broker is not going to use a negotiator every single day but it’s an additional tool in the broker’s toolbox that could be handy when they need it once every few months. You’ve got to have these allied services so that you can provide a more holistic service to your client.” 

Who is being held hostage to debt?

Despite the prospect of a bounceback in the economy post-lockdown, many SMEs have continued to struggle to meet their expenses. Australian Bureau of Statistics (ABS) data from June 2021 revealed that up to 17 per cent of SMEs found it difficult or very difficult to meet their financial commitments over the following three months (particularly those in arts and recreation services, accommodation and food services, and retail trade).

While government stimulus measures (including multiple business grants and JobKeeper payments) buffered businesses from catastrophic damage, the winding back of these measures could lead some SMEs to accumulate more debt in the near future. Some businesses could use multiple credit card facilities to manage their expenses and spiral further into debt as a result.

Mr Hugo said that some businesses that were “running hand-to-mouth” prior to the COVID-19 crisis collapsed when the pandemic reached Australia’s shores, while previously healthy SMEs that were impacted by the pandemic eroded their savings and accumulated debt to stay afloat but were not on the radar of financial hardship measures.

He predicted that over the next few months, years, and perhaps decade, some of these businesses would fail or struggle to clear these debts.

“Therefore, we’ll be seeing a fair amount of business coming from people who have just not been able to pay their debts off at all because of all the money that they had to borrow over the last 18 months,” he said.

“How long can they dip into their savings, and how long can their savings last before they fall into trouble? How long do they not pay themselves?”

However, it is not just businesses that are at risk of accumulating debt. While this holiday season is a time for celebration and rejuvenation for many, clients could be saddled with substantial credit card debt as they purchase gifts for loved ones and book tickets for their next getaway after months of being confined to their homes during lockdowns and border closures.

For these clients, the new year could be an opportunity to start afresh by clearing or reducing debts and managing finances.

Freedom through negotiation

Before assessing whether a client would benefit from debt negotiation services, understanding the technicalities of it is critical for brokers. As the term suggests, a debt negotiator negotiates with the client’s creditors (including lenders or the Australian Tax Office) to waive a part or all of the debt owed by the client. This could be done through the use of negotiation skills, industry contacts, and legal knowledge (including the National Consumer Credit Protection Act, with a focus on hardship compliance), and without the use of the Bankruptcy Act.

Clients could avoid filing for bankruptcy through debt negotiation, although in some instances this could be a more suitable alternative depending on their personal circumstances.

In addition, it could enable the creditor to recover at least some of the money they are owed rather than no money at all. For example, a $25,000 credit card debt could be reduced to $5,000 if the negotiators can offer a strong enough argument, such as possible compliance errors by the bank, or client financial hardship.

Because debt negotiators in Australia are not backed by legislation to force banks into an agreement (unless the negotiator uncovers a creditor’s non-compliance to a code like the NCCP), the negotiator must rely on their negotiation skills to slash their clients’ debts with creditors.

Debt negotiators will audit a client’s file to assess their eligibility for their services, and will agree to represent clients if they meet the criteria to qualify for a debt waiver. For instance, if a client has budgeting issues rather than financial hardship, they would not qualify for a debt negotiator’s services through Credit Mediation Services.

“If we couldn’t ethically demonstrate financial hardship, we won’t represent [them],” Mr Hugo said.“We might refer them to a budgeting specialist instead because we don’t want to leave them high and dry.”

Mr Hugo explained that at Credit Mediation Services – whose service offerings include business debts, credit card debts, and personal loans – debt negotiators would examine their client’s entire portfolio to identify sensitive points and “hot button” factors that would convince a creditor to waive debts.

“If I approach a bank and say: ‘I’m experiencing severe financial hardship and can’t afford to pay my credit card bills’, they may give me a three-month repayment moratorium because that’s all they’re legally obliged to do,” he said.

“But a negotiator will pull out key elements of the client’s story that they know the banks are sensitive to and they’ll weave it into the negotiations. Through the course of a few weeks of negotiations, the bank could eventually agree that they should be taking a haircut on the account.”

Brokers who refer clients to Credit Mediation Services would receive a commission, he added.

Bumpy road ahead for clients

A confluence of other factors could see clients’ debt pile grow, including rising house prices and household debt levels.

Indeed, the Reserve Bank of Australia (RBA) recently warned that while the strength of the housing market could spur economic growth, there may be underlying risks.

“While household debt to income in Australia hasn’t increased much over recent years, it is at a high level, both historically and relative to other countries,” assistant governor (financial system) Michele Bullock said.

Housing is also commonly used as collateral for loans by SMEs. If there were to be a correction or decline in house prices, it could potentially destabilise the value of that collateral, which could lead to borrowers being unable to service their debt.

Furthermore, some mortgage holders who leveraged equity in their residential properties to cover their debts in the past could find that this is no longer an option if property price growth softens in 2022 because they would already be leveraged at full capacity.

These clients might also be struggling to service unsecured credit card debts and have reached the facility’s limit, but find that they are no longer in a position to refinance as they might have done in the past.

Moreover, if house prices were to decline, borrowers would be unable to recover the debt in full if they sold the property and incurred a loss.

Mr Hugo noted that a greater number of households have been seeking loans to cover expenses and shortfalls.

“Households are leveraging credit (in both secured and unsecured loans) and accessing the equity in their property to see them through lengthy lockdowns and the reduced income that has resulted from this for many,” he said.

“The inevitable hangover of the booming housing market will be highly leveraged properties looking down the barrel of rate increases and increased serviceability demands.

“Hard times are indeed ahead.”

As such, it is incumbent on brokers to assess whether referring clients in financial hardship to a debt negotiator would provide some relief, he suggests.

Many SME and individual clients could be at risk of mounting debt levels (including credit card debt) as they recover from the COVID-19 crisis and the (traditionally debt-heavy) holiday period. Brokers could assist these clients by referring them to a debt negotiator, who could help reduce or eliminate their debts The Adviser explores why debt is currently an issue, the ins and outs of debt negotiation, and how including them in referral networks could benefit brokers and their clients

Referring clients to a debt negotiator

Debt negotiation could be a viable option for clients in various circumstances, including business clients with excessive credit card debts.

For example, Scott Vine, owner and director of specialist non-conforming mortgage business Lending Solutions Group recently refinanced a client who had a mortgage with a non-conforming lender to a lower interest rate.

However, the client (who was previously self-employed but had switched to ordinary wages when their business collapsed) also had 20 credit card facilities in which they had amassed around $190,000 in debt.

Mr Vine referred the client to Mr Hugo, who reduced the debt by $86,000.

Credit Mediation Services – which only charges fees when the negotiation is successful – was paid 22 per cent of the client’s savings amount.

Explaining his reasons for referring the client to a debt negotiator, Mr Vine said: “I could have consolidated their debts and saved them money. But I knew that the client had been through financial hardship and could see that there was more money to be saved through negotiation.

“We also reduced his interest rate in the process.”

However, brokers should be aware that debt negotiation might not be suited to every client, and as such, should assess each client’s individual circumstances.

“It’s got to be circumstances where people are struggling, and the clients could not keep up with the payments on these facilities,” Mr Vine advised.

Mr Vine concluded by advising brokers to only refer clients to a “respectable and honourable firm that’s not going to waste you or your client’s time, and that’s going to do the right thing by the client”.

“A broker is not going to use a negotiator every single day but it’s an additional tool in the broker’s toolbox that could be handy when they need it once every few months 

– Laurence Hugo, director, Credit Mediation Services

Final thought from Credit Mediation Service

In the last 25 years, the mortgage industry from the position of consumer and mortgage professional has presented exciting highs and depressing lows. Lately, the market has been emboldened by high-property valuations and cheap money, stimulating opportunities for all.

However, in the boom-bust cycle, many consumers may have overreached and overexposed themselves. As a client-centric broker, you need to know a highly experienced debt specialist who will help your clients with debt waivers through negotiations.

As specialised financial negotiators, and allied service for brokers for 25 years, we have waived $85 million for our clients without the need for bankruptcy, nor any impact on their credit report.

Laurence Hugo

director

Credit Mediation Service