Managing debt: five tips for turning your finances around

There’s a common misconception about debt that people only end with money troubles if they have done something incredibly stupid. As a society, we want to believe that the people we see losing their house or being sued in court are there due to their own foolishness, greed, or lack of judgement.

But the reality is often very different. In my work providing wealth education across Australia, I have met hundreds, if not thousands, of people living under the strain of massive debt. While some of them have unhealthy ways of thinking about money – mostly developed through their childhoods – the vast majority are bright, well-meaning, law-abiding individuals. A large number of them have been blindsided by unforeseen events that have hampered their ability to pay their bills. It could be unexpectedly losing a well-paying job or becoming too ill to work. Or maybe they have experienced a death in the family, an unforeseen bill, or double dealing by a trusted business partner.

I know from personal experience just how easy it can be to slide into debt – and how fast it can happen. In the early 2000s, I was a well-paid barrister, working mum and wife, with a string of investment properties. Then, during the GFC, a single investment unravelled, and I found myself going spectacularly broke and losing the family home. My low point came when the family and I ended up camped in my mother-in-law’s lounge room.

The good news is that falling into serious debt isn’t the end of your life, and just like any tribulation it can be managed. I was able to work myself out of debt, rebuild my investment portfolio and create a profitable business. With the right attitude, some negotiation and a little hard work, just about anyone in debt can put themselves back on track and potentially even emerge in a stronger position than before. If you have found yourself in debt, try following these five tips to getting back on the right path.

Face up to the problem

When you feel frightened and stressed, the two most tempting things to do are to run away from your problems or pretend they don’t exist. The same fight/flight/freeze responses to threatening situations that helped our ancestors escape predators tend to work against us when resolving modern-world problems like missed mortgage repayments and a maxed-out credit card. Resist your impulse to panic, take a deep breath, and instead try to take stock of your situation. Writing down who you owe money to and how much is owed can have a calming effect. It’s as if the act of expressing your situation on a piece of paper puts your fears into perspective and makes them easier to manage.

Reframe your understanding of debt

Thanks to the media and the powers that be, we tend to have a bit of a binary understanding of debt. On the one hand, there are those who honour their commitments, who immediately repay every cent they borrow and who act honourably. On the other hand, there are the defaulters who fail to meet their repayments, fall into insolvency and are then declared bankrupt. It’s an all-too-simple explanation of debt and finance that fails to recognise the reality of the modern world – and leaves anyone with a debt problem feeling like a criminal. The truth is much more nuanced, with individuals and corporations frequently sitting somewhere in the massive space between the two extremes. In one way, defaulting on a payment or two is a normal financial state.

Negotiate with your creditors

Once your head is in order and you know the extent of your debt, it’s time to start negotiating. Contact each of your creditors and arrange a meeting to explain the situation and to see what can be done. There’s no one-size-fits-all when it comes to this kind of work. You’re likely to find some creditors are keen to move forward and arrive at a solution while others are more stubborn, meaning you’ll need to look for another way over, around, under or through the obstacle. Try to remember that you have more power than you might realise. It takes creditors significant resources and energy to change the status quo by repossessing your house or taking you to court. Now might also be a good time to consider legal advice and representation. While it’s an added cost, having professionals go into bat for you and get the best deal possible can save you money in the long term. The DG Institute, for example, offers an all-inclusive legal package for people trying to negotiate out of debt.

Use all the resources at your disposal

While having trouble with debt may be new for you, rest assured that many others have been in this situation before you. Every day of the week contracts fall over and people miss payments and default on loans. The good news is that this means there are a wide range of resources and institutions set up to help people like you who are having problems. If your issue is with a bank or financial institution explore the Financial Ombudsman Service, the Code of Banking Code of Practice and the Consumer Credit Code. There are laws and regulations in place to ensure consumers are not exploited by lenders and a code of conduct for debt collectors to follow.

Get on with life

It might take some time for you to get totally on top of your debt problem. A year or so is not uncommon for coming to an arrangement with all your creditors. In the meantime, try to compartmentalise your problems and don’t let dealing with debt dominate your life. Pack the issues you’re dealing with away when needed so you can focus on your job, making money and exploring other opportunities. It will help enormously if you feel you are moving forward towards a goal rather than continually cleaning up a mess.

So, if you have found yourself with a debt problem, don’t lose hope. There’s every chance you can work your way through and come out stronger, wiser and happier.