What happens if you can't pay off debt?

If you’re struggling to pay off debt and you’re unsure of what's going to happen, you’re not alone – Around a third of Australians have experienced financial hardship in the last three months. While Dealing with bankruptcy and debt may feel like the end of the world, there are a number of strategies you can utilize to pay off your debt, such as seeking legal aid, meeting with financial counsellors, taking out debt consolidation loans, or a balance transfer card. For financial advice, read our previous article ‘9 tips to get financially fit. 

So, what happens if you can’t pay off debt?

Let’s get to the following commonly asked questions:

• What happens if you can't repay a debt?
• Can you go to jail for debt in Australia?
• How long can you owe a debt?
• What can you do to pay down debt?

Note: If you’re looking for ways to save money, please visit WeMoney’s Offers to find out how we can help you save money, consolidate personal loan debt, and raise your credit scores.

What happens if you can't repay a debt?

The consequences of not repaying a debt vary, from late payments to increased loan rates to having to deal with a debt collector. For the most part, it depends on how many minimum payments you’ve missed, and if you’re consistently missing your monthly repayment plan. 

Let’s cover two types of debt: personal and business. 

Personal debts 

If you’re struggling to pay multiple debts, your loan issuer will begin either collection proceedings or issue court action, which will have a serious effect on your credit score. Missing payments will stay on your record for seven years, affecting your ability to buy real estate, take out a personal loan, or refinance your mortgage. 

To avoid this happening, we recommend learning to consolidate your debt. You can do this by using a debt consolidation calculator and either completing a balance transfer, taking a loan, or using your home equity. This will get rid of debt faster, diminish your credit card balance, and help you avoid bad credit.

Important: If you’re looking to find out how much your current repayments are, or estimate future or ongoing costs, then head on over to the calculator section, which has calculators for home repayments, loan comparison, and personal loans.

Business debts

Running your own business can be a gamble, especially when you’re faced with repaying business loans and business credit cards. If you stop making loan repayments and your business faces low income you’ll be hit with insolvency–i.e. When your business liabilities exceed its assets. 

When this happens, it’s vital that you cease all trading to minimize the impact on your creditors, and get advice from an insolvency practitioner to look for a debt solution for your business banking. Luckily, business owners are not personally liable for a corporation’s debt on business cards. 

Related: How to pay off debt faster?

Can you go to jail for debt in Australia?

The short answer is no, you cannot go to jail for debt in Australia. Even if the accrued debt is linked to a financial crime, like tax avoidance, you can never be criminally charged for the debt alone. 

However it’s still important to protect yourself, and while you’ll never face jail time, you could face court action by being sued by your creditors for not paying your bills. To avoid this, always try and make the minimum payment on the amount you owe set by your card issuer. This can be achieved by working out a feasible monthly budget and maximizing how much you can afford to pay.

How long can you owe a debt?

In most Australian states, the limitation period for paying off a line of credit is six years. If you’re based in the Northern Territories, you can owe a debt for only three years. Within this time period, creditors can pursue debt starting from when: 

• The debt became payable. 
• The last date of a credit card bill payment.
• The date where you acknowledged your debt was owed (in writing).

This time period will reset if you start debt payoff through debt repayment, or acknowledge the debt in writing. 

What can you do to pay your debts?

We understand the anxiety of looming debt and financial hardship. If this happens to you, it’s important to quickly establish a financial plan and start the process of saving money to begin making repayments. There are a variety of strategies you can use depending on the amount you owe.

Here are some tips for dealing with debt and making repayments as quickly as possible: 

• Set up savings accounts: By setting up a savings account you’ll earn much better interest rates on your money than standard bank accounts or debit cards. Use this money to pay your minimums every month and avoid a hit on your credit score. 
• Research debt management plans: A debt plan allows you to alter your agreement with your creditors and make more feasible payments. 
• Consolidate your credit reports: Pay attention to your credit rating and reports to understand where you're going wrong and how to improve your score over time. 
• Set up a balance transfer credit card: Pay the debt off faster with a balance transfer credit card. This allows you to transfer your debts to a lower-interest card, making debt relief far easier. 
• Practice the snowball method: By paying off your smallest loans first, you can free up more cash to pay off your larger loans over time. This makes saving money simple. 

Related: How to set up a debt repayment plan?

Summing up

Not being able to pay your debt can be a stressful experience, but with a detailed debt repayment strategy you’ll soon free up the extra cash needed so you don’t continue to miss payments. If you’re struggling to understand your repayments, use loan calculators, and set up regular direct debits. The internet is a great resource for tools and access to additional information to help find the right debt solution for you. Another option also worth considering is contacting the national debt hotline which can provide information.

If this is still a struggle, contact your bank to discuss your annual fees, repayments, and a potential compromise on your debt agreement. It can also be a good idea to speak to financial counsellors or even seek legal aid if necessary. Alternatively, check out our debt consolidation loans for better peace of mind. 

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Disclaimer: The author is not a financial advisor and the information provided is general in nature and was prepared for information purposes only. This article should not be considered to constitute financial advice. Accordingly, reliance should not be placed on this article as the basis for making an investment, financial or other decision. This information does not take into account your investment objectives, particular needs, or financial situation.