A surge in personal bankruptcies triggers a debt agreement warning

Concerns have been expressed concerning the likelihood that customers in financial distress are exacerbating their difficulties by using costly debt settlement strategies.

The focus is on:

Personal bankruptcies increased by 1.1%.

Insolvencies fell by 3.5%, while debt settlements rose by 7.3%.

  • The ASIC recommends avoiding costly and ambiguous debt arrangements.

During the third quarter of 2018, the number of personal bankruptcies grew by 1.1% year on year, while the number of debt agreements increased by 7.3%.

Since then, the number of bankruptcies has reduced by 3.5%.

The number of personal bankruptcies filed in the third quarter of 2018 was 7,590, a 22% decrease from the previous year’s quarterly peak of over 10,000 during the height of the global financial crisis.

Fiona Guthrie, CEO of Financial Counselling Australia, finds it sad but not unexpected that the number of people entering into debt agreements, many of which are inappropriate for them, is increasing.

Ms. Guthrie saw a long-term pattern of increasing debt and decreasing bankruptcy.

“Companies that earn a lot of money from loan arrangements actively sell their goods on television and the internet.”

According to Ms. Guthrie, the typical allocation of debt settlement payments is 40% to the debt management company and 60% to the creditors.

She observed that many individuals are in a worse financial state than they were before they completed a full payment on their debt.

Whether they are soliciting assistance or not, you have to wonder whether they are really solvent.

Individuals in financial need are typically better off filing for bankruptcy than negotiating with a debt settlement company.

ASIC analyses murky and often illegal debt arrangements.

In addition to monthly costs, it is usual for the initial payment of a debt management agreement to be up to $2,000.

The Australian Securities and Investments Commission released a damning report on debt management firms earlier this year.

Among the notable results are:

  • The lack of price and charge transparency made it impossible for customers, who were often already suffering considerable financial difficulties, to weigh the true cost against the ostensible benefit.

Clients were often asked to pay in advance for services, a practise known as “front loading,” which built customer loyalty by encouraging them to spend money in advance.

When adopting some selling methods, there is a lot of pressure to make a sale.

  • Firms’ lack of knowledge of applicable legislation and the consequences of particular practises, which may result in suboptimal services for customers, as well as a lack of information about important dangers.
  • Customers, who were often in desperate financial difficulties, struggled to weigh the fees and expenditures against the perceived benefit.

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