- Kate is 25 years old and living overseas. Her student loan debt is $25,000 and she has not paid anything since she moved to Australia 3 years ago. Kate intended to pay when she got on her feet but since being in Australia she has only been able to find casual work and she finds it hard to get by.
- William is in his late 40s. He moved to Australia 20 years ago, after graduating with a student loan debt of $15,000. He is a well paid professional, with a mortgaged home. He lives a lavish lifestyle and he has built up debt in Australia. Despite having a good income, he never seems to have spare money. In the last 20 years he forgot about his student loan debt as he heard nothing from the IRD. Two weeks ago, the IRD contacted William and told him that his debt was $90,000 and that the arrears portion of $60,000 needed to be paid immediately, or else.
Both William and Kate could apply for hardship which would mean that they were no longer behind on the debt arrears (capitalised on to the core debt with an interest adjusted) and give them an opportunity to have a fresh start with payments. In Kate's case, her minimum payments would then be around $40 per week ($2,000 per year - payable in two instalments) and the IRD states that the debt should be paid off in about 18 years. Kate could try to get a second job and crush the debt by throwing every spare dollar at it. This path won't necessarily be easy, but many people do hit debt hard, and at this level of debt, it wouldn't take long to get rid of it in full forever. In William's case, even if hardship is granted, he will still have a massive debt. If he hasn't managed to deal with his debt in the last 20 years, when it was smaller, is it realistic to hope that he can deal with it now? Some people do manage to resolve a debt at this level but that is rare. For William, a hardship application may take the immediate pressure off but it just means that he still has a debt headache to deal with in the future. William is middle aged and he doesn't have many working years left, compared to Kate. If his arrears are capitalised, and he pays the IRD's minimum of $5,000 per annum, the IRD's calculator suggests that the debt will never be repaid. How will he pay off his mortgage, and save for retirement, with a huge student loan debt millstone?
Both Kate and William could consider a payment arrangement with the IRD for the arrears. If this is accepted, they will have to pay their minimum annual payments in addition. Under this scenario, Kate is also much better off than William as both her arrangement payments and annual obligations are likely to be far less and, therefore, more manageable. The IRD may also look more favourably on Kate as she has come to them at an early stage.
If bankruptcy needs to be considered, Kate is also in a much better position than William. Bankruptcy usually lasts three years and Kate will still be young when she comes out of it. Kate is used to managing on a small budget and being bankrupt won't make much difference to her lifestyle. She has no assets to lose. She will have plenty of time to rebuild her life financially. William owns a home and he may lose it if he becomes bankrupt (this outcome is not certain but it is possible and will be affected by various factors). William's lifestyle expenses are likely to be curtailed while he is bankrupt, and he may face having to restart financially when he is around 50 years old. William's bankruptcy option is more difficult than Kate's, but if bankruptcy is William's best option he is probably better to do it now when he is in his late 40s, rather than when he is even older.
We deal with people like Kate and William all the time. It is much better to deal with your debt sooner rather than later. Not only is there less debt to deal with, there are better resolution options, and the impact of resolution on your life, now or in the future, may be significantly less. If you are a William, please don't let that get you down. You can still deal with the debt knowing that it is better to do this now rather than to put it off even longer.