What Can You Do If You Cannot Afford to Pay a Default?

Being unable to pay a default does not necessarily mean that ignoring the situation is the only option.

Financial difficulty can make it tempting to stop responding to creditors altogether. But there are different pathways that may be available, and they can have very different consequences. The appropriate option depends on the debt, your financial circumstances and what has already happened.

One possibility is a financial hardship arrangement.

If you are experiencing genuine financial difficulty, you may be able to make a hardship request to the relevant credit provider. ASIC explains that consumers can give a hardship notice and that the credit provider must respond to the request.

A hardship arrangement may involve changes to repayments or other changes to the credit contract. It does not simply erase an existing default.

There is also an important distinction between a hardship arrangement and the removal of a default. They are separate matters. Financial hardship information can be recorded against repayment history information, and the OAIC states that financial hardship information remains on a credit report for one year.

Another possible pathway is debt negotiation.

Depending on the circumstances, the type of debt and who currently holds it, it may be possible to negotiate an arrangement to resolve the outstanding amount. There is no guarantee that a particular creditor or collector will accept a specific proposal. The outcome depends on the individual circumstances.

It is therefore worth understanding the position before making assumptions about what can or cannot be negotiated.

A more serious option is a Part IX debt agreement. This is a formal insolvency process under the Bankruptcy Act 1966. It should not be treated as simply another payment plan.

A debt agreement can have significant consequences. The Australian Financial Security Authority explains that entering a debt agreement is an act of bankruptcy and that details can be recorded on the National Personal Insolvency Index. It can also affect future access to credit.

Because of those consequences, anyone considering a formal debt agreement should understand the implications before proceeding and consider independent financial or legal advice.

The first step does not necessarily have to be choosing one of these options.

Start by establishing what is actually on your credit file. Obtaining current reports can show whether the original default is still present, whether other negative information has appeared and whether a court judgment has been recorded.

It is also important to establish who currently owns or manages the debt. A debt may have been transferred from the original creditor to a collection agency.

Once those facts are clear, you can assess the available pathways more realistically.

A default also should not automatically be treated as valid simply because it appears on a credit report. Under the OAIC's requirements, consumer credit default information can only be listed when specific conditions are met, including requirements relating to the overdue amount, the period overdue and notices sent by the credit provider.

That is why reviewing the circumstances surrounding the listing can be worthwhile before deciding what action to take.

If you are trying to understand what may happen when an unaffordable default is left unresolved, What Happens If You Ignore a Default on Your Credit File? explains the potential escalation from an unpaid debt through collection activity and, in some circumstances, court action.

There is no universal solution for financial difficulty. The right approach depends on the facts.

This information is general educational information only and is not financial or legal advice. Formal debt solutions can have significant consequences. Consider independent professional advice before making a decision.

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