The entrenched model of sending in debt collection agencies to pick up cash or repossess stuff people bought on credit is not the only solution to recovering unpaid debt.
Two Kiwi financial innovators established the social enterprise Debtfix because they witnessed the impact bad debt has on the total well-being of a large sector of New Zealand society.
Shaun Adams and Christine Liggins have backgrounds in finance, budgeting and financial literacy and they know there are debt repayment solutions that create more positive outcomes for everyone.
Adams is a qualified insolvency practitioner with 35 years insolvency and restructuring experience and Liggins is an experienced budget adviser and SIO supervisor and a trustee of creditors’ proposals, working with the courts.
Generally, the costs associated with debt collection are added to the overall debt and Debtfix believes this can automatically bump up what someone owes by a significant amount – up to 20 to 30 per cent in some instances.
Add to that possible court fees, and the debt escalates into a stressful situation that creates a negative cycle that can be difficult for the borrower to escape from.
Debtfix uses a repayment model that benefits the debtor and the creditor, and generally, their clients’ lenders are recovering anywhere between 50 to 100 cents in the dollar owed.
For simple, single outstanding debt a collection agency may recover the debt effectively.
However, when a person has complex debts with several lenders that could include an unpaid credit card, personal loans, guarantee liabilities, a hire purchase smartphone agreement, rent arrears, unpaid fines, and more – the game plan is different.
Each creditor competes with the others whereas as a debt collector only chases a single debt.
They can’t assist the person trapped by their financial predicament because their job is only to recover as much of the single debt they are instructed to collect.
Invariably, the person drowning in debt juggles one debt against another and spirals into a bottomless pit of financial distress, with interest accruals, late-payment fines and ever increasing charges.
Resolving debt to benefit all
Negotiating skills and non-judgemental assistance are essential attributes for the Debtfix team.
All advice and support to a client is given for free.
They work closely with the Financial Capability Trust (FINCAP), Moneytalks and the national network of budget advice services to ensure clients get local budgeting and financial capability support that is proven to successfully improve a client’s long-term relationship with money.
They are also involved with a new initiative Safer Credit and Financial Inclusion Partnership, a collective of different organisations that are looking at ways of helping to increase financial inclusion and methods of alleviating problem debt.
The success of the debt solution process adopted by Debtfix is achieved by taking a holistic view of a client’s whole financial position, including a review of their household income, outgoings and debt commitments.
Then, Debtfix advises on the best strategies for them to repay as much of the debt as possible.
In the Debtfix life raft they support clients by negotiating with the lender.
They may request the lender to;
- Stop interest and penalties from accruing,
- Reduce the value of repayments and increase the loan duration,
- Lodge a hardship application,
- Negotiate a payments holiday,
- Negotiate or structure debt write offs.
Is all of this being soft on the borrower?
Debtfix believes the overall outcome is improved, with creditors receiving higher rates of repayment and borrowers being supported to get their lives back on track.
Debtfix does everything in its power to prevent clients from going bankrupt because this significantly and adversely impacts on a person’s life, effects their financial stability for a long period of time and causes extreme shame and embarrassment with the process advertised for the world to see.
Should lenders be more financially responsible?
Debtfix questions whether creditors, from banks through to high-cost lenders, should take a more holistic view of the financial position of the borrower.
Their customers are ratchetting up more and more debt to service their loans and it just takes one significant life event to make borrowers find themselves in trouble.
The effect of the Australian Royal Commission into Misconduct in the Banking, Superannuation and Financial Services Industry and recent reviews have put a lot of pressure on banks.
They call into question if the lending undertaken by banks is appropriate for all borrowers and there is a lot of focus on only lending money to those who can afford to pay it.
Banks are clearly tidying up their act and often they recognise that there is little point in using debt collectors and causing their customers more misery.
However, for some lenders the easy option is to then sell the debt and walk away from the issue, which in many instances they have helped create by lending to someone that never had any hope of repaying the debt.
How do people end up in perpetual debt?
To better understand New Zealanders trying to keep their heads above water, Debtfix recently surveyed their database and 74 per cent of respondents stated they were employed.
The most common reasons cited for their debt problems were a relationship breakdown or divorce (34.6 per cent), reduced hours at work for more than three months (22.2 per cent) and a health change or chronic condition (17.0 per cent).
Respondents tried multiple actions before contacting Debtfix, most commonly cutting back on expenditure.
However, to stay afloat, many respondents resorted to using credit cards and overdrafts for daily living, borrowed money from family and friends and/or took payday loans and other high cost credit.
A recent survey conducted by New Zealand rehabilitation organisation, Active+ reported that their respondents were most likely to worry about finances (75.4 per cent).
A report by the Commission for Financial Capability (CFFC) backed this up with a recent report saying that 69 per cent of New Zealanders are concerned about money, with that figure rising to 74 per cent of women and 82 per cent of those aged 18 to 34.
In a Debtfix survey, 56.9 per cent of respondents scored their well-being at 2/10 or lower before they contacted Debtfix.
After Debtfix started providing support and debt solutions, those feeling very low reduced to 20.5 per cent of respondents.
Respondents reported being more positive about their well-being, with increases in all scores of 5/10 to 10/10 once Debtfix was in action.
How Debtfix is funded?
Debtfix does not charge its clients fees for discussing how to get out of trouble with debt and is transparent about any fees that may be charged for certain debt solutions that may be adopted.
Generally, the bulk of Debtfix’s costs for administering debt solutions are borne by creditors with fees (based on statutory scales) being deducted from repayments made to them over time.