By Amaran Navaratnam MICM CCE*

Debt. In simple terms, borrowing a principal amount and the repayment is a matter of principle! Contractually and ethically.

Many Australian households lack the necessary financial knowledge needed to stay out of debt, or simply staying on top of their contractual repayments, leaving them over committed and heavily relying on unsecured credit facilities such as credit cards and personal loans.

The Australian Securities and Investment Commission (ASIC) debt clock reports show that there is a total of $32 billion dollars owing on credit cards alone in Australia within the demographic age of 35-54 having three or more credit cards. According to June 2016 survey, 70.19% of Australian adults own a credit card and 50.4% of Australian households are using credit cards for household bills.

The current issue within Australian households is the lack of financial literacy when it comes to our credit and debt appetite, for some individuals when they encounter any form of hardship they will follow the appropriate steps in resolving the issue, but some may take longer to face the debt due to ego and circumstances, this ultimately resulting to a credit default listing against their name.

When we begin to face a considerable amount of debt and are unable to make repayments some households tend to 'bury their heads in the sand' and turn to tv, internet and radio advertisements for debt assistance without understanding the consequences of Part IX debt agreement or any form of the Bankruptcy Act as the right words are being used in promoting debt assistance and are deemed psychologically comforting.

Financial Hardship
I see financial hardship as the expected, yet, unexpected knock on the door. The knock on the door can be from any one of these visitors, commonly referred to as "hardship triggers" such as divorce, loss of income, natural disasters, mental and physical illness.

When one or more of these unexpected 'visitors' come to visit, you can never predict if it is a short or long-term stay. During the period of financial hardship household preference payments are focused on mortgage or rent, followed with other bills to keep the house in order and food on the table to simply survive.

What happens to the unsecured product repayments during a period of financial hardship? They get pushed to the bottom of the 'household preference payment list' and left to attend at a later date, but it may be too late as a credit listing may have already occurred.

Credit and collection officers can agree that the smaller debts that households tend to consider curable at a later date can be 'the ice-berg that sinks the ship' of having a good credit rating score.

By catching financial hardship early and taking the necessary steps to rectify the debt within its early debt cycle reduces the risk of default, writ, judgment, or leading towards any form of bankruptcy.

Lack of financial literacy
The ethical solution to when a household enters into hardship is to contact the creditor(s) to discuss an alternative repayment or, enter into a hardship arrangement. But are the average households following the correct processes or simply 'burying their heads in the sand'?

Having worked within the credit and risk industry for close to six years I can confidently state that "how one handles their financial hardship can determine its severity and their propensity to pay any given creditor." Households need to be smarter in managing their delinquency and overall debt management through education and awareness and it needs to begin now!

It is quite common for credit and collection officers to receive a call from a customer advising that they are in the process of applying for a Part IX or Part X debt agreement and wish not to be contacted, and when the officers advise the customer of the short and long term consequences officers will tend to hear "oh no, I didn't know that" which steers the conversation from entering into a debt agreement to now a mutually agreeable payment without government intervention. Everything proceeds through an educational conversation with the customer.

What concerns me the most about debt agreements is how it is currently being promoted to the households of Australia as a 'get out of debt' strategy with the promotion of stress free living without being appropriately educated with its consequences.

Any form of bankruptcy application should not be promoted as the first option!

Sometimes all it takes is regular communication and working in collaboration with your credit lender to resolve or meet a suitable positive outcome for both.

Financial literacy within households
Households in Australia now and in the future need to be smarter in managing their delinquency in particular with their unsecured facilities such as credit cards and loans and be educated on basic credit laws, principles and hardship processes.
There has been a rapid increase in the number of brokers selling debt agreements to financially stressed and vulnerable households where the brokers are either charging a fee to the debtor or are paid a fee by the debt agreement administrator for the referral.

Credit managers are continuously reviewing and improving their hardship processes and improving their early intervention strategies by offering a highly-experienced customer service to the point of perfection, but there is always going to be the 'critical gap' where customers are lured by debt assistance promotions and the only way to intervene during this critical gap is through the appropriate credit and debt education and awareness.

The Wesley Mission in a recent article is calling on the Government to provide Australians with better financial education, in the hope that it could help people avoid falling into financial crisis.

From a young credit professional perspective there needs to be a push to all households and provide credit and debt education and awareness material starting from schools to households currently experiencing hardship.

Basic education and awareness will in fact rehabilitate our economy as an end result as households will become smarter in the way they manage their credit and debt enabling businesses to lend more rather than reject applications due to bad credit listings.


*Amaran Navaratnam MICM CCE is the Young Credit Professional Chairman (Vic/Tas).
Vic/Tas 2014 YCP Finalist and recipient of the 2014 Tony Mammone Award.