What should I do if I’m getting into debt?
Having debt is not necessarily a bad thing. For example, businesses often have to borrow in order to start up or expand, and people take out student loans in order to increase their chances of well-paid employment after they graduate.
The trouble starts if you become unable to meet your debt repayments.
It’s important to act as soon as you realise you may not be able to meet future repayments. You can:
- See a financial mentor, who can help you work out how you got into this situation, and support you in getting out of it. They can help you think of ways to cut back on your expenditure (some great money-saving ideas are on the Sorted website.
- Tell your creditors as soon as possible, so they know of your situation, and try to negotiate changes in your payments with the creditor so that you can make your payments more easily.
- Check whether you have any insurance to cover you in this situation e.g. credit-related insurance, income protection insurance (if your work situation has changed)
- Check to see whether Work and Income assistance available.
- Consider applying for an early withdrawal of some of your KiwiSaver funds, on the grounds of significant financial hardship.
- If you think you will not be able to meet your tax obligations, contact Inland Revenue and tell them of your situation
- Check your credit contracts so you know what property may be repossessed, and find out what to expect if this happens
- Get legal advice about your insolvency options (just in case) e.g. No Asset Procedure, Summary Instalment Order, bankruptcy.
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I have received a debt collection notice telling me my payment is overdue for a bill I have already paid. What should I do?
In the first instance you should immediately write to the debt collector or your creditor (the person or organisation you owe money to) with a copy of any evidence that you have already paid this bill. Ask for them to respond within seven days and to put on hold any debt collection action. If you are contacted by a collection agency then you should provide them with a copy of the letter you sent to the creditor and ask them to put the collection action on hold because the debt is in dispute.
If the creditor does not respond within the seven days or you are not happy with their response contact them again (preferably in writing) to explain that you are making a formal complaint. If they continue to try and collect the debt during this period then you should consider contacting the Dispute Resolution Scheme of which they are a member.
If you have been contacted by a debt collection agency over a debt which is not yours, write to them to explain this (and keep a copy of your letter). Include copies of any evidence you may have to support you. Unless you can get the debt removed from their records, they could still use the information about the debt to affect your credit rating.
If this does not resolve the issue, either party can make an application to the Disputes Tribunal.
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I’m having trouble meeting my repayments, how should I talk to my creditor about this?
If you’re having trouble making your repayments then it’s best to talk to your creditor (the person or organisation you owe money to) as soon as possible. Most creditors will be willing to discuss ways to help make sure that you are able to meet your obligations.
If you are repaying a consumer credit contract and your ability to repay it is affected by an unexpected change in your financial circumstances, you may be able to negotiate more manageable repayments under the hardship provision (see the next question).
Even if you aren’t eligible to apply under the hardship provisions most creditors are willing to negotiate with borrowers who are acting in good faith. It’s best to contact the lender as soon as you can and let them know that you are having trouble making the payment and what you are trying to do to fix it.
A good first step is to contact a financial mentor to help you evaluate your financial situation, offer ideas on saving money, and help you decide whether you can refinance your debts e.g. through debt consolidation. Your financial mentor can also help you prepare for negotiation with your creditors, by helping you work out a realistic payment plan.
Depending on your situation, you could ask the creditor about:
- smaller repayment amounts so that the amount you owe is repaid over a longer period of time
- postponing repayments for a period of time
- paying a lump sum which is less than the amount you owe, but more than they would receive if you were declared bankrupt (called a ‘compromise with creditors’)
- a combination of the above
It is in the interest of most lenders to work out something for people in this situation. After all, they won't get their money back if the borrower stops paying altogether.
Whichever terms you and the creditors agree on, it is important to get it down in writing. Consider getting someone with legal expertise to document the agreement or check it before you sign.
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What is the ‘hardship provision’ in relation to credit contracts?
If you are having problems with repaying debt that is related to a consumer credit contract because of an unforeseen change in your circumstances (e.g. a job loss), you can apply to the lender for hardship provision. It is a legal requirement for lenders under the Credit Contracts and Consumer Finance Act (CCCFA) to consider applications for hardship provisions. If you can come to such an arrangement with your lender, this may mean that you can pay off the debt in smaller amounts, or take a 'repayment holiday' until you are able to afford the full payments again.
This option is not available to you if:
- you have been in default for more than two months or
- you have missed four or more consecutive payments, or
- you have been in default more than two weeks after receiving a repossession warning or Property Law Notice (which a mortgage lender can issue if the mortgagee is in default).
To apply for the hardship provision:
- contact the lender as soon as you realise you will not be able to pay, because arranging for hardship provisions can take time
- provide some documentation, for example a redundancy notice or doctor’s certificate, to support your reason for making your application (e.g. illness, injury, loss of employment, or the end of a relationship).
It is important to realise that, whether your successful hardship provision application results in a repayment holiday or smaller repayments for a while, you will probably end up paying more in the long term for the loan because interest will normally accrue in the meantime.
The lender must tell you that they’ve received your letter within five working days of receiving it. They must let you know with ten working days if they need further information from you, and they must notify you of their decision (whether or not to accept your request) within 20 working days.
If you think they have unfairly declined your hardship application you can go to the District Court or Disputes Tribunal. Your local Community Law Centre may be able to help you, and provide advice on how to claim hardship provisions.
The lender must comply with the lender responsibility principles when considering your hardship application (view sections 12.9 – 12.11 of the Responsible Lending Code). This includes things like:
- if they are aware that you are about to make a hardship application, they should tell you what information they’ll need to assess your application, and how long the assessment is likely to take
- telling you about any free and independent budgeting services available to help you with a new repayment plan
- considering putting off actively pursuing the debt for a reasonable period of time, if you are developing a repayment plan to present to them
- they must not repossess any consumer goods from you while considering your hardship application, unless they believe the goods are at risk (e.g. of being disposed of)
- they should only decline a hardship application if there are genuine reasons for doing so. If they decline your application they must tell you why, in writing.
The lender also cannot charge you a fee for considering your hardship application.
If you think your lender has unfairly declined your hardship application you can go to the District Court or Disputes Tribunal. Your local Community Law Centre may be able to help you, and provide advice on how to claim hardship provisions.
More about hardship provisions is on the Consumer Protection website.
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What is debt consolidation?
Getting a debt consolidation loan means that all your debts are taken on in a single loan by one finance provider at one interest rate (sometimes a lower rate but not necessarily). Debt consolidation loans are offered by most banks and other financial lenders. There are some risks involved in taking out a debt consolidation loan though.
If you are considering consolidating your debts, you should:
- try to keep your repayment period short. Otherwise, you may end up paying a lot more money in interest charges
- get advice on the consolidation loan contract from someone other than the lender before you sign it
- check that you can afford the payments
- check the interest rate is not higher than what your bank would charge you
- check for any other fees that may be charged by the provider
Your local CAB can help you find out about how these work and what it means to have one.
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What fees could I be charged if my debt is taken over by a debt collection agency?
Debt collection costs
In addition to the original debt amount and accumulated interest, you could also be liable for debt collection fees and late payment (default) fees. You only have to pay them if you were warned about collection costs beforehand e.g. on a credit application form or a sign on the lender's premises.
The collection fees must be related to work done by the creditor or the collection agency and be reasonable. What is reasonable will depend on the situation and on the debt collection agency, but debt collectors can charge an administration fee plus a commission of up to 30% of the amount owed, and GST on top of that.
You can ask the creditor or debt collector to explain the costs, and compare them with those of other debt collectors. If you think the costs are unreasonable, you can apply to the Disputes Tribunal and ask for a reduction in fees.
If the debt is being recovered through the courts, the court could decide that you have to pay the court fees and the creditor’s legal costs. Note that the debt collection agency is not allowed to tell you that non-payment will definitely lead to court action, or that court action has begun if it hasn't.
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I left the country owing money. Can they track me down overseas to get their money back?
Some large organisations (e.g the Inland Revenue Department) do employ international debt collectors to trace debtors who have left the country owing significant amounts of money. The debt collectors can trace you to your current location and either sell your debt to a local debt collection agency – who will continue with the collection process - or have a local agent pursue the debt.
The person or organisation to whom you owe money may also lodge your debt with a credit reporting agency, so that your credit history may prevent you from borrowing in the future in New Zealand (and possibly overseas also).
If you owe money to the Inland Revenue Department (e.g. a student loan) which starts attracting interest once you have been out of the country for more than six months, or the Ministry of Social Development, they will probably be notified as soon as you return to New Zealand – this is because of the data matching scheme between New Zealand Customs and government agencies - and will contact you regarding your debt.
I am being chased up for an old debt from years ago – isn't there a time limit?
In general, if the debt is more than 6 years old they can’t take you to court about it – unless, within the last 6 years, you’ve paid some of the money back, admitted to the debt in writing, or been ordered by the Court to pay the money.
Read more about the time limit on claims on our Limitation law page.