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Getting it right: managing financial hardship

Financial hardship is an ongoing social and economic problem for the community as a whole.

Put simply, Australians have a high incidence of personal debt.

Australian household debt has risen steadily over the past three decades as more of us aim to own homes while continuing to rely on products such as car loans and credit cards to fund non-essential purchases. In fact, the ratio of household debt to income has almost tripled between 1988 and 2016, going from 64% to 185%.

While many other developed countries have seen a decline or ‘levelling out’ of personal debt since the 2008 global financial crisis, Australia’s debt levels have continued to increase. As a result, Australia is now reported to have the highest personal debt levels in the world.

But its not all as bad as it seems.

When it comes to Australia’s personal debt, it’s worth defining the difference between ‘good’ and ‘bad’ debt.

Good debt is taken on as a way to build wealth in the long term. For example, a home loan allows you to work towards owning your own home, and an investment property mortgage allows you to earn income from property you rent out or re-sell at a higher price.

On the other hand, bad debt diminishes your wealth over time. This means it is not attached to an asset, and usually indicates you have paid for items or services you would not be able to afford based on your income. For example, relying on a credit card for non-essential items, or those that diminish in value over time, would lead to bad debt.

In the case of Australia’s household debt, the majority of it can be defined as good debt, with more than half going to home loans and around 40% to investments. That’s a total of around 90% of our personal household debt spent on potential wealth-creation.

That leaves the remaining 10% as bad debt. To put this into a comparable context, the Federal Reserve Bank of New York reported that that non-housing personal debt (i.e. ‘bad’ debt) made up 26.3% of America’s personal debt in the first quarter of 2016.

Given the average Australian household owes around $250,000, then approximately $25,000 of it can be considered bad debt. And it’s this debt that has the greatest potential impact on the prevalence of financial hardship applications.

What is financial hardship?

Financial hardship is when a customer is willing but unable to meet their contractual debt obligations because of unexpected events or unforeseen changes that impacts their cash flow. Examples include:

• Changes in income or expenditure

• Changes in employment status (such as losing a job or having hours reduced)

• Significant life events such as a relationship breakdown or death in the family

• Injury or illness

• Emergency event or natural disaster.

Generally, customers experiencing financial hardship can reasonably be expected to recover their financial position if appropriate assistance or arrangements are provided. Financial hardship assistance is intended to bridge the time between when a customer’s circumstances change and the time when they can start paying their debt in full - either because their original financial situation is restored (e.g. a person is re-employed after a period of unemployment) or because a new repayment arrangement is agreed which the customer can meet.

So how can financial hardship be effectively managed to result in a win-win for all parties?

Recognising financial hardship

Creditors unclear about what constitutes financial hardship and their readiness to treat hardship appropriately have a higher incidence of unrecoverable debt. Whilst financial hardship by its very nature must be determined on a case-by-case basis, following best practice industry guidelines can mean the difference between long-term recoverability and premature write-offs.

A Unified Approach

From customer service to credit management to accounts receivable, a consistent and sensitive approach to recognising and managing financial hardship can result in a lower percentage of avoidance. The trend since 2009 by Australian credit lenders to formulate guidelines for all customer-facing departments to detect and deal with financial hardship has resulted in early detection and a sustainable volume of return.

A Central Hub

Similarly, a central debt collection department works best within the same financial services sector. From mortgages to personal loans to credit cards, having the one department manage all areas can streamline the process for the company and the customer resulting in better solutions and outcomes for all.

Adopting a Best Practice Approach

To achieve the best outcomes requires a best practice approach. Comprehensive training and quality control can impact on all levels of recoverability. Whilst hardship is measured predominantly as income versus expenses, once a determination is made, the ability of the company to work with the debtor to find solutions that are fair, equitable and sustainable creates a win-win environment. It also facilitates easier contact with repeat bad debtors.

Breathing Space

Allowing customers to regroup after major upheavals is key to managing debtor hardship. Whether the cause is illness, job loss or relationship breakdown, formulating a reasonable plan for recovery that is customised for the customer’s particular circumstances fosters a nurturing environment that pays forward. The debt is managed in a gentle, yet consistent way and the customer is given the time to get back on their feet without the constant pressure of debt collection.


Educating the customer on better ways to manage their money and meet their financial commitments is elementary to all successful hardship collection. Sometimes it’s as simple as suggesting they see a financial planner to better prioritise their expenses and understand which expenses ones are non-essential. This can lead to greater sustained long-term recoverability and a reduction in future hardship.

A collaborative approach is fundamental to successful recovery of hardship debtors. Early detection and set guidelines on how to deal with hardship can certainly contribute to a reduction in premature write-offs. Ultimately though, it is the sensitivity and space afforded the customer on a case by case basis that creates a positive environment for managing and collecting these debts.

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