The debt trap: Seek help with money trouble

The wheels can fall off rapidly.

Rather than do the maths on our outgoings and incomings, many of us prefer self-deception, robbing Peter to pay Paul. Eftpos declined - it's a bank error. Cheque bounces, time to increase the overdraft. Credit card maxed-out, get another credit card. Can't afford a holiday, put it on the mortgage. Bank won't lend any more, find a money-lender.

Then a shock comes - the car dies or the phone's cut off - and the penny drops: you're over your head in debt. Only then, when the repo man is banging down the door or a threatening creditor's letter arrives, do most of us seek help.

Sitting down with a budget adviser or financial planner is like facing the truth mirror: no make-up, no distortion, no hearing the sales pitch instead of seeing the reality - the ugly, unpalatable face of debt.

The budget adviser is a doctor, social worker, psychologist, priest and life coach rolled into one. They must strip away the disguise, see through the denials, to find the bottom line.

"Most of our clients have no idea of their financial position," says Papakura Budget Advice Service co-ordinator Denise Smith.

"They come to us when they're in arrears and the finance company's getting upset with them or the power's about to be cut off.

"They don't know what interest they're paying. When you do the sums it's clear they couldn't afford it in the first place."

The first thing the budget adviser does is to write everything down and work out a budget.

"It all comes down to budgeting and having a plan, which you can't do if you don't know what your situation is, says Smith. "You have to educate yourself - commitment is vital. Even if you're on a high income you have to have a plan."

The West Auckland Budget Advice Service asks clients to record all their spending in a notebook.

"It sounds a hassle but it teaches you to be more accountable," says co-ordinator Fiona Snijder.

Advisers look for ways not only to reduce outgoings but to boost disposable income.

They check that low income clients are getting all their entitlements such as accommodation allowances and Winz benefits. They encourage home baking for kids' lunches and snacks, and meal planning.

"Parents tend to justify spending $12 on fish and chips when they can feed a family of five on $8 and it's nutritious," says Snijder.

She cites a high income earner who had no idea where his money was going and needed help. Now he's saving $110 a week to pay off loans.

"He was spending a lot on clothing. You have to look seriously at what you really need rather than what you want."

"Instead of going out to dinner three or four nights a week why not go out once a week?"

But most people struggle with the discipline of a budget. Snijder says low income earners sometimes "blow it".

"They splurge almost to legitimise that they are here, that they are a person, because it's not fun to live on a tight budget."

INDEPENDENT financial planner Susanna Stuart says people have to be prepared to make sacrifices "and maybe sacrifice is not a trendy word anymore".

"It's really peculiar because someone comes to you in dire straits, they're hocked up, they know they can never pay, and you ask them to cut out things and they'll say, 'no, I can't cut that'.

"Why pay $100 for your haircut? Even when they're trying to cull back, they just can't give up things.

"Discretionary items have become a must-have."

Long working hours and busy lifestyles play a part.

"I tell people if they do a big cook-up in the oven, several casseroles will last them.

"But just the effort to plan ahead - people just don't have time."

Some clients can't be helped, says Stuart. "Some people have addictions and it boils down to some sort of psychological problem.

"I had an executive who was earning $300,000 and he had no assets to his name apart from a boat that was depreciating. He was chasing the status. All his clothes were branded. When he was going out, he would pay for champagne because it would look good."

On the other hand, she cites a solo mother with two young children who studied to become a lawyer.

"She did it but it was a sacrifice - no social life for a number of years and having a very organised household.

"The people who achieve things will have clear goals and objectives."

Snijder agrees attitude and discipline are the keys to working your way out of debt.

"You need someone alongside you when you have these concerns."

Advisers try to educate clients about the pitfalls of hire purchase arrangements and hidden charges, and to avoid sales pressure.

"Don't sign on the spot. Take it home, read it, sleep on it and do the sums."

She asks clients to put a box outside their front door for flyers so they don't make it to the kitchen table - useful if there are acquisitive children inside.

Creditors, even debt collectors, are generally more flexible when debtors are seeing a budget adviser, often agreeing to lower weekly payments or postponing payments while another debt is cleared.

Repossession happens but "when people are about to get vehicles repossessed because they're $2000 in arrears, magic occurs. Where they come up with it, who knows - it generally falls on the family's shoulders".

Snijder says Pacific Islanders and Asians are more vulnerable than Europeans to repossession, probably due to language barriers and not understanding the terms they signed up to. "All they see is the outcome - the item they want. They don't understand the interest rate, that what they purchased for $2000 will cost them $5500."

Alternatives to repossession can include obtaining court summary instalment orders - where interest may be frozen and weekly repayments set by the court - and bankruptcy.

"The main advantage is to reduce the stress," says Snijder. "If you've got a $50,000 debt on an $18,000 [a year] benefit you can't make life decisions.

"People who are that constrained feel bankruptcy won't make their quality of life any worse - and it can almost give them a new lease of life. They can't see the wood for the trees."

Advisers and financial planners can teach habits that have wider benefits, says Snijder. "You see a real change in people. They carry a much lighter burden and can think clearly. They start to think about concerns other than 'is the home going to go to mortgagee sale next week?'."