What to expect when you can't pay your debts

Posted December 2019

Plus top tips for how to deal with it...

Debt can come about for a variety of reasons.

Sometimes it’s a necessary evil, others it’s a last resort.

Despite your best intentions, things don’t always go to plan. Unforeseen expenses, bills, emergencies, or even losing your job could quickly see you struggling to make your loan or debt repayments.

The question is, what happens then?

Today we’re shedding some light on the things you can expect to face if you’re struggling with unpaid debts. These include:

• A poor credit score
• Dealing with lawsuits
• Difficulty borrowing in the future

It’s not all bad news! You’ll also find some great advice for plotting your path to financial freedom.

Let’s get started...

1. You may have to file for financial hardship

If you find yourself in strife, you may be able to apply for financial hardship.

Financial hardship assistance is designed to help Kiwis who find themselves struggling to meet their existing financial obligations - such as loan repayments and bills - but do not qualify for income assistance.

Various financial providers across New Zealand offer forms of financial hardship support, so it’s worthwhile getting in touch with your provider first to find out what’s available to you.

If you’re suffering from severe financial hardship, whether it’s being unable to afford the cost of living or you or a family member has fallen ill, then you may also be able to access a portion of your Kiwisaver savings.

If you’re thinking about applying for financial hardship, you can:

• Consider consolidating all of your debts into one, easy-to-manage loan.
• Contact your financial provider and figure out a repayment plan that works for you.
• Find out if you are eligible to withdraw from your Kiwisaver in order to cover the costs.

2. Your credit score might fall

Missing payments or defaulting on a loan will lower your credit score.

Credit scores play a vital role in determining how risky you are as a borrower for things like mortgages, loans, and credit cards.

It’s not just financial institutions that use this rating, either. Insurance companies, landlords, and even mobile providers consider your credit rating when taking you on as a customer or tenant.

If you’re struggling with a low credit score, you can:

• Review your credit report and dispute any outstanding errors.
• Avoid making multiple credit applications within a small time frame.
• Tackle your smallest debts first and then work your way up using the Snowball method.

• Want to do more? Quickly & easily improve your credit score with our guide 

3. Your goods may be repossessed

Failing to settle overdue debts could leave you at risk of having your items repossessed.

The most common example is a secured loan, which is usually ‘secured’ against an asset such as a vehicle or property. If you’re unable to pay, lenders or collection agencies may be able to seize the assets in order to repay the outstanding debt.

If you’re worried about your goods being repossessed, you can:

• Apply for financial hardship or income assistance if necessary.
• Sort out a repayment plan with your lender or debt collection agency.
• Consider other options such as debt management, settlement, or consolidation.

4. You might face legal action

Nobody likes to end up on the wrong side of the law, but you may find yourself there if you fall behind.

Following a duration without payment - usually 60 days - lenders or collection agencies acting on their behalf may be able to take you to court to retrieve their money if you have unsettled debts.

Debt collection agencies will often work with you first in order to make a plan for repayment. However if you’re uncooperative or refuse to pay, then lenders are within their rights to take legal action if it’s stated within the terms of their contract.

If the court sides with the lender, this could result in a lawsuit, repossession of goods, or your employer deducting part of your pay until you have paid the full loan amount.

If you’re stressed about potential legal repercussions, you can:

• Aim to only ever borrow what you need or can afford to pay back.
• Get ahead of any legal action and instead discuss your circumstances with the lender.
• Weigh up the potential for consolidation, bankruptcy, or no asset procedures (NAP).

5. Future borrowing may become difficult

The saying ‘Once bitten, twice shy’ is very true when it comes to debt.

Lenders are less willing to approve loans for those who have struggled to repay debt in the past. If they do decide to lend? It will often be at a much higher rate due to the perceived risk of lending you money.

Financial providers aren’t the only ones who may be wary of taking you on if you’ve defaulted on a loan or have a low credit score. Employers, landlords, and even utilities providers will all take your financial track record into account.

If you’re worried about your chances of being approved in the future, you can:

• Work to improve - and maintain - your credit score.
• Whenever possible, pay your outstanding debts on time.
• Discuss your reasons for past difficulties with your lender (i.e. medical or emergency expenses).

Struggling with debt? You don’t need to stress

Sometimes ‘just a little discipline’ isn’t enough to keep you from falling into debt. Thankfully, starting along the path to financial freedom doesn’t have to be scary. In fact, as we’ve explored today, it can be as easy as picking up the phone and asking for a little help.