Accessing extra money

Sometimes people have take out insurance that will pay their debts if their circumstances change.  The most common types of insurance are

Consumer Credit Insurance and

Income protection or disability insurance

If people have taken out mortgage insurance with their home loan, they often wonder whether this covers them if they have trouble with their mortgage payments.  Although you pay the premium for mortgage insurance, it is there to cover your lender if you default.  You can’t access mortgage insurance to help with mortgage payments.

Consumer Credit Insurance (CCI) usually covers situations of unemployment, illness, involvement in an accident, and death.  in the case of job loss, CCI insurance will usually only cover your loan repayments for a period of three months.

You should check all your loan agreements to see if you have consumer credit insurance.  You may have taken a policy at the time you signed your loan contract, and the premium may even have been included in the loan. You can request information from your lender about this.  Your policy will only be valid if you are paid up on all due premiums.

If you do have CCI, you should lodge a claim with your insurance company as soon as possible after the event that is covered, or as soon as you realise you will not be able to pay your loan because of your loss of income.

When you lodge a claim for consumer credit insurance you’ll need to provide copies of all documents that prove your change of circumstances, including your letter of separation from your former employer and your termination payment advice.

You should keep a record of all phone contact and a copy of all correspondence you have with your lender and the insurance company and the claim for you submit.   Don’t let your lender discourage your from lodging an insurance claim if you think it might apply to your circumstances.

If you can’t afford to make your loan repayments while you wait to hear the outcome of your insurance claim you should write to the lender saying:

• * Your circumstances have changed and what that change is
• *  You are unable to make a payment that is due; and
• *  You have lodged a claim on your consumer credit insurance.

You should ask the lender not to take any enforcement action until your claim is processed, and ask them to confirm this writing. If they do not agree, lodge a complaint immediately with your lender’s external dispute resolution scheme. (See "Disputes" fact sheet on the Legal Action page.)

If you have not heard from the insurance company about your claim after two weeks, phone to check they received your claim and ask when they expect to make a decision. The insurer must provide you with a progress report on your claim every 20 business days.  The insurer is required to notify your lender that you have submitted a claim. This notification should mean no steps will be taken to enforce the loan until the claim has been processed.

f you can show urgent financial need of the benefits of the claim, your insurer should:

• Fast track the claim assessment and decision, and
• Make an advance payment to alleviate your immediate financial difficulties within five business days of you satisfactorily demonstrating financial need; and
• Notify any financial institution you have told them has an interest in your claim.

If your claim is refused, and you don’t think it should have been, you should immediately lodge a complaint with the insurer’s Internal Dispute Resolution department requesting that the matter be reconsidered. If you are still not satisfied with their decision you can lodge a dispute with the insurer’s External Dispute Resolution Scheme (EDR). (See the "Disputes" fact sheet on the Legal Action page.)

Keep in mind that insurance policies do not cover consumers against all losses. Typically, there will be exclusion or limitation clauses restricting the circumstances when the insurer pays out on claims.  For instance, a policy for protection against job loss may not be valid if you’re simply working reduced hours and not completely out of the workforce. It may also not apply if your work is in a contract or temporary position.  You can get legal advice about your rights under an insurance policy.

Sometimes people take out insurance to cover them if they are not able to work due to illness, injury.  You might have:

• Income protection insurance that pays a portion of your income if you are not able to work
• Trauma insurance that pays you a lump sum you if you suffer an illness or injury covered by the policy or
• Total and permanent disability insurance that pays out if you are never able to return to work due to an illness or injury covered by the policy.

These insurance policies can be complex.  You should contact your insurance company or the broker who sold you the policy to find out about the extent of the cover and how to make a claim.  Sometimes this sort of insurance cover is linked to your superannuation, so it is worth checking with your superannuation fund to see if you have cover that way.

Some financial institutions and private companies promote refinancing your loan and consolidating your debts as ways to make your debts more manageable. However, if you’re in financial hardship, you need to read the fine print if you are considering these options. You may, in fact, end up paying more under the changed arrangements than you would have in your original loans.

Refinancing involves cancelling your current loan agreement and entering into a new loan agreement with your current lender or another lender. Debt consolidation usually means getting a new loan or varying an existing loan to pay out a number of other loans.  You should talk to a financial counsellor before making a decision on refinancing or debt consolidation.

Most people refinance or consolidate debts in an attempt to make their loan repayments more affordable in the short-term. However, the cost of your new loan (including interest, fees and other charges) must be significantly lower than what you have been paying for this to be an effective debt management strategy.

Bear in mind that if you have recently lost your job or experienced reduced income it is unlikely that a lender would be offering you a less-expensive loan.

If you consolidate loans, you may end up with fewer debt payment options if your difficulty is ongoing. For instance, you will not be able to negotiate payment plans for individual debts and you may not be able to access specific hardship programs. (See various fact sheets on the Dealing with Debt page.)

People usually consolidate debts to:

• Reduce monthly payments;
• Manage a single debt instead of several debts, all with different conditions, terms and payment dates;
• Save money when the interest and costs are lower overall than the interest and costs of the old loan arrangements.

Refinancing or consolidating debts may seem attractive options in the short-term. However, they may have disadvantages when viewed over the term of your loan including:

• You may have to pay exit fees to get out of existing loans early.
• The fees and charges of setting up and maintaining your new loan may be more expensive than if you had kept your existing loan/s.
• If you change your unsecured debt into a debt secured over your home, your equity in your home will be reduced and you’ll be paying off the debt for a longer time, making it more expensive.

You need to check the costs of your current loan against its cancellation cost plus the set-up and ongoing costs of any new loan before you decide to refinance or consolidate your debts.

You should consider:

Interest rates

If the loan has fixed or variable interest

All fees and charges for the life of the loan

Monthly payments over the life of the loan

Applicable exit fees

Any other available options to reduce your debt

Any security required under the loan agreements

If you are ahead with your mortgage payments, you may be able to re-draw against the mortgage to pay out loans with a higher interest rate.

It may be less costly to transfer all of your other debts to your mortgage account and extend its term than it would be to refinance into a whole new loan.  In the longer term, you may be able to fast-track paying off the extra debt when you get your finances under greater control. This way you can reduce the overall costs of the loan. You might also increase your loan repayments by as much as you can afford, or if you find yourself with extra money, make a special loan repayment.

If you are not ahead on your mortgage, increasing it by adding other debts would need to be thought through carefully (see Traps of Refinancing below). You may have other options. Talk to a financial counsellor.

Getting deeper into debt

Consolidation can get you even deeper into debt by letting you borrow more money. For example, if you transfer your credit card balances onto your home loan, you might be tempted to put new debt onto your credit cards. If the consolidation loan simply increases your overall level of debt, you are making your financial problems worse.

Losing your assets and your family and friends

Before you turn all your unsecured debts (such as credit card debts) into a secured debt (using an asset such as your home as security), remember that your assets will be on the line if things go wrong. If your home is jointly owned with someone else, they will have to pay your debt if you can’t.

Dodgy lenders and brokers

There are brokers and lenders that take advantage of people who are desperate to save their home. They do this by:

• Charging them high fees, sometimes more than 20% of the equity in their home
• Arranging a refinancing agreement where it is extremely unlikely that the borrower will be able to afford the new repayments. This is called ‘equity stripping’ and has landed a lot of people in hot water financially.

Equity stripping can be very lucrative for brokers and lenders, as they can make big profits at minimal risk. Some lenders have been known to charge borrowers 50% interest or more, and higher rates if they default on the loan.

Here are some warning signs that your broker may be dodgy:

• They ask you to sign blank documents or credit application forms with false information in them
• They arrange a business loan for you when you only want a basic consumer loan
• They do not discuss your financial situation in detail before arranging a loan
• They do not explain fees, charges and repayments before you sign up
• They tell you not to worry about reading the paperwork
• They advertise that they can help you no matter how desperate your financial situation.

Some emergency assistance is available from government and from charities for people facing financial problems.  There are also special grants for people in financial hardship to help with some payments.  Interest free loans are also available in some circumstances.

If you need help urgently with living expenses, there are charities that can help you with:

• Food, transport or chemist vouchers
• Rent or accommodation
• Part-payment of electricity, gas or water bills
• Food parcels or clothing
• Budgeting or referrals to other programs

The Emergency Relief program is funded by the government. There are over 1300 outlets for emergency relief across Australia run by charities and community organisations.  If you don’t know who to contact in your area, you can talk to a financial counsellor.

Most states and territories have some form of mortgage relief scheme that can provide a grant or a loan to people having trouble keeping up with their mortgage payments.  Different help is available in different parts of Australia.

These schemes are not suitable for everyone because of their eligibility requirements and the extra repayment obligations you may have if the scheme provides a loan.  You can talk to a financial counsellor to see what is available in your area.

There are a number of State, Territory or Federal-based utility relief schemes that are available to people who are struggling with paying their bills.  While each scheme has its own eligibility requirements, they are generally only available to people who receive a Centrelink payment, or hold a Health Care or Concession Card.  To find out what utility relief schemes you may be eligible for, check on the back of your utility account or with your utility supplier directly. You can also talk to a financial counsellor.

If you receive an income support payment or Family Tax Benefit Part A and meet the qualification criteria, you may be eligible to receive part of your fortnightly payment in advance as a lump sum. The amount of Advance Payment you are able to receive depends on how much you are paid each fortnight and which payment you are receiving.  If you receive an Advance Payment, a portion of your regular payment will be deducted each fortnight for 26 weeks until the Advance Payment has been repaid.  For information about Advance Payments visit the Centrelink website.

One option when dealing with a debt that is causing you problems is to pay it off or reduce it, by using your savings or by selling an asset such as a second car, boat or maybe even jewellery.

Using savings to pay down debt could be very cost effective.  The interest you may lose by using your savings would be more than covered when considering the cost of not dealing with the debt.  Selling assets may also be an option, or in fact a necessity, when a debt is about to crush you.

Being forced to sell an asset may mean you sell at a reduced value or you sell an asset you may not be able to replace.  However, this may be better than having an asset eventually seized by the creditor and sold at auction for far less than you may be able to sell it for yourself.  If you do use assets to pay down debt, remember that it may be better to act sooner rather than later.

You need to consider selling your home if:

• You cannot afford your loan repayments
• You will be unable to afford your loan repayments in the future.

You need to make this decision early because it is better to sell your home yourself rather than have the lender sell the home for you. You are more likely to get a better price for your home and avoid lots of legal costs.  You also need to give yourself as much time as possible get a good price.

The decision whether to sell your home is most difficult when:

• You are unemployed and trying to get a job, or
• You are ill and don’t know when you will be well, or
• You are waiting for a compensation payment.

In these circumstances, an option might be to:

• Make a repayment arrangement with the lender for up to 6 months;
• If by the end of the 6 months you still cannot make the loan repayments you should put your home on the market;
• Go back to the lender and negotiate a further arrangement on the basis you are selling your home.

It is never too late to ask for time to sell, but the lender is less likely to agree later in the enforcement process and enforcement costs will be added to your loan as the legal proceedings progress.

You should lodge a dispute with an external dispute resolution scheme quickly if:

• You are unable to make a repayment arrangement with the lender; or
• The lender is threatening to commence legal action; or
• The lender has issued you with a Statement of Claim but has not obtained a court judgment.

There is more information about external dispute resolution schemes in the fact sheet on "Disputes" in the Legal Action page.

You need to place your home on the market. You need to price the home realistically so that it will sell, but for the best price possible. If you are using a real estate agent you should explain what time frame you need to sell the home within. This will usually be under 6 months but could be under 3 months depending on what arrangement you make with your lender.

You need to give copies of evidence that you are selling your home to the lender. This evidence should include (where available):

Copy of the contract with your real estate agent

Evidence of advertising of your home

Front page of the contract of sale

Marketing plan

Negotiate a repayment arrangement on the grounds of financial hardship with your lender. You are negotiating the arrangement on the basis that:

• You are in financial hardship
• You can make regular repayments of what you can afford until the home is sold
• You have a reasonable time to sell your home (ask for 6 months but you may need to consider agreeing to 3 to 4 months)
• When the home is sold your loan will be repaid.

If the lender

Will not agree to the proposed variation, or

Threatens legal action, or

Commences legal action

You can lodge a dispute with an external dispute resolution scheme (see the fact sheet "Disputes" on the Legal Action page).  You can also talk to a financial counsellor or get legal advice about this.

If you think your home may be worth less than the amount you owe on your home loan, get legal advice. (See Legal Action page.)

You normally can’t access your superannuation until you reach the minimum age set by law, (preservation age), and you permanently retire from the workforce. However, under certain circumstances, including if you have lost your job, you can apply to have some of the money in your superannuation fund released before you retire to help you manage your debts.

You may be required to pay tax on any superannuation released early.  There have been some scams promoting early access to superannuation.  If you are approached by anyone offering to help you get early access to your superannuation you should check the Australian and Securities Investment Commission website for more information about the sorts of scams operating.

Accessing your superannuation early to pay bills is a short-term trade off for  temporary financial protection. You should only consider using superannuation after you’ve investigated all other debt management options and preferably talked to a financial counsellor.

Accessing superannuation early can cause a lot of harm to your long-term financial position and may not be worth it.  For example, you could access your superannuation early to help pay your mortgage, but still lose your home if you can’t keep up the payments in the long term.  You are also using money that would otherwise be protected from your creditors to pay your debts.  The other impact is on the superannuation funds available to you in retirement which will be reduced.

Early release of superannuation is always at the discretion of your superannuation fund. You need to make initial enquiries with your fund if you are considering this option, and then advise your creditor or make an application to the Department of Human Services if you apply on compassionate grounds.

A large number of superannuation funds allow access to a lump sum from accumulated superannuation accounts once every 12 months if your application is based on one of the following grounds:

• 1. Specified compassionate grounds (to prevent sale of your house by your mortgage holder, or to pay medical, disability or funeral expenses); or
• 2. Grounds of severe financial hardship (for “reasonable immediate family living expenses” including loan repayments, rent arrears, outstanding bills, car repairs and medical expenses).

Applications for specified compassionate grounds are lodged with the Department of Human Services (DHS) using their application form.  You can apply for early release of your superannuation funds to pay your mortgage on compassionate grounds if:

• You are in arrears and having difficulty paying, and
• Your lender wants to sell your home because you are in arrears, and
• Your name is on the mortgage documents (either individually or jointly), and
• The mortgage is for a property that is your normal place of residence (that is, not an investment property).

The amount you can access early on compassionate grounds depends on the balance of your account and the specific bills or debts you wish to pay. For mortgages, DHS can authorise the release of a lump sum equivalent to three months mortgage payments plus 12 months interest on the outstanding mortgage balance.

Application forms are available on the DHS website. To apply you need to:

• Complete all the appropriate questions on the relevant DHS Early Release of Superannuation Benefits application form; and
• Collect the relevant supporting documentation to prove the compassionate grounds upon which you are making your claim; and
• Submit your complete application to DHS.

You should advise your mortgage lender (or other creditor if your request is for medical or funeral expenses) you have applied for release of superannuation funds and request that no debt enforcement action is commenced against you while your application is being processed.

DHS will assess your application within 10 days of receiving all required information and documentation. They will advise you in writing of their decision on the release of your funds.

Even if you obtain approval from DHS, your superannuation fund is not obliged to release your funds early if their policy disallows early access.

You should apply directly to your superannuation fund for early release of funds on the grounds of severe financial hardship. Note that applications on financial hardship grounds are made directly to your superannuation fund and not the Department of Human Services.

To be eligible you need to demonstrate to your superannuation fund:

• You have been receiving certain Centrelink allowances (including Newstart Allowance or Disability Support Pension; but not Austudy) for at least 26 weeks continuously (39 weeks if you are over 55); and
• You have requested and received from Centrelink within the past 21 days a standard letter that confirms you receive a required Centrelink allowance; and
• You have insufficient money to meet your ‘reasonable and immediate’ living expenses.

To apply you should write to your superannuation fund, explain your circumstances and demonstrate that you meet the eligibility criteria.

If your superannuation fund agrees to release your superannuation early, you may receive a lump sum of up to $10,000 (less tax) for a one-off financial problem, such as paying outstanding bills. The funds cannot be used to pay day-to-day expenses, or cover debts that are not currently due (such as the full balance of a credit card or personal loan).

Obtaining access to your superannuation funds early means:

• You use your own funds to manage your debt rather than taking out additional loans;
• Your lenders and creditors will stop calling you to demand payment and threaten repossession of your home while the payment covers arrears;
• You will be under less stress and can work on reducing your other debts; and
• If you see your present need as greater than your future anticipated need in retirement, you’ll feel in greater control of your debts.

Early release of superannuation funds does have some serious consequences including:

• Funds released prior to retirement are taxed at a higher rate;
• Less superannuation will be available to you in retirement or if you face another period of financial hardship;
• Funds in superannuation accounts are protected from creditors, however, when released early they lose this protection;
• There have been some illegal schemes to access superannuation where promoters have exploited people in financial hardship by charging excessive fees; and
• Superannuation funds may charge a service fee and other costs for making the funds available early;
• Unless early release pays off all your debts, you may pay your money to your creditors and still lose your home.

No Interest Loans are available for people on low incomes for the purchase of essential household goods, such as washing machines and fridges. The amount available is in the region of $800 to $1,200.

Around Australia there are more than 200 loan outlets, situated in community agencies. To find your closest provider, go to the website of Good Shepherd Microfinance.

To apply, you'll need proof of ID and documents showing how much money you have coming in and out.