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What are ‘good’ and ‘bad’ debts, and which should I pay off first?

<p><em><a href="https://theconversation.com/profiles/angel-zhong-1204643">Angel Zhong</a>, <a href="https://theconversation.com/institutions/rmit-university-1063">RMIT University</a></em></p> <p>With the cost of living soaring and many struggling to get a pay rise, it’s not surprising people are using debt to navigate life’s financial twists and turns.</p> <p>Owing money can sometimes feel challenging, but not all debts should keep you awake at night.</p> <p>So which debts are good and which are bad? And in what order should you pay them off? As it all depends on your personal circumstances, all I can offer is general information and not financial advice. Ideally, you should seek guidance from an accredited financial adviser. But in the meantime, here are some ideas to consider.</p> <h2>What is a ‘good debt’?</h2> <p>Good debts can be strategic tools and help build a solid foundation for your future. They usually increase your net worth by helping you generate income or buy assets that increase in value.</p> <p>With good debts, you usually get back more than what you pay for. They usually have lower interest rates and longer repayment terms. But personal finance is dynamic, and the line between good and bad debt can be nuanced. If not managed properly, even good debts can cause problems.</p> <p>Some examples of “good debts” might include:</p> <p><strong>Mortgages</strong>: A mortgage allows you to buy a house, which is an asset that generally increases in value over time. You may potentially get tax advantages, such as <a href="https://www.ato.gov.au/forms-and-instructions/rental-properties-2023/other-tax-considerations">negative gearing</a>, through investment properties. However, it’s crucial not to overstretch yourself and turn a mortgage into a nightmare. As a rule of thumb, try avoid spending <a href="https://www.cnbc.com/select/mortgage-affordability/">more than 30% of your income</a> per year on your mortgage repayments.</p> <p><strong>Student loans</strong>: Education is an investment in yourself. Used well, student loans (such as <a href="https://www.studyassist.gov.au/help-loans/hecs-help">HECS-HELP</a>) can be the ticket to a higher-paying job and better career opportunities.</p> <h2>What is a ‘bad debt’?</h2> <p>“Bad debts” undermine your financial stability and can hinder your financial progress. They usually come with high interest rates and short repayment terms, making them more challenging to pay off. They can lead to a vicious cycle of debt.</p> <p>Examples of bad debts include:</p> <p><strong>Payday loans</strong>: A payday loan offers a quick fix for people in a financial tight spot. However, their steep interest rates, high fees and tight repayment terms often end up worsening a person’s financial problems. The interest and fee you may end up paying can get close to the loan amount itself.</p> <p><strong>Credit card debt:</strong> Credit cards can be like quicksand for your finances. If you don’t pay off your purchase on time, you’ll be subject to an annual interest rate of around <a href="https://www.rba.gov.au/statistics/tables/">19.94%</a>. For a A$3,000 credit card debt, for example, that could mean paying nearly $600 annual interest. Carrying credit card debt from month to month can lead to a seemingly never-ending debt cycle.</p> <p><strong>Personal loans:</strong> People usually take personal loans from a bank to pay for something special, such as a nice holiday or a car. They often come with higher interest rates, averaging around <a href="https://www.finder.com.au/personal-loans">10%</a>. Spending money that you don’t have can lead to prolonged financial headaches.</p> <p><strong>Buy-now-pay-later services:</strong> Buy-now-pay-later services often provide interest-free instalment options for purchases. This can be tempting, but the account fees and late payment fees associated with buy-now-pay-later services can lead to a long-term financial hangover. The convenience and accessibility of buy-now-pay-later services can also make it easy to get further and further into debt.</p> <h2>So in what order should I pay off my debts?</h2> <p>There is no one right answer to this question, but here are three factors to consider.</p> <p><strong>Prioritise high-interest debts</strong>: Start by confronting the debts with the highest interest rates. This typically includes credit card debt and personal loans. Paying off high-interest debts first can save you money and reduce your total debt faster.</p> <p><strong>Negotiate interest rates or switch lenders:</strong> Don’t be shy. A simple call to your lender requesting a lower rate can make a significant difference. You may also take advantage of sign-on offers and refinancing your loan with a new lender. In the banking business, customers are not usually rewarded for their loyalty.</p> <p><strong>Consider different repayment strategies:</strong> Choose a debt repayment strategy that aligns with your preferences. Some people get a psychological boost from paying off smaller debts first (this is often called the “<a href="https://www.wellsfargo.com/goals-credit/smarter-credit/manage-your-debt/snowball-vs-avalanche-paydown/#:%7E:text=The%20%22snowball%20method%2C%22%20simply,all%20accounts%20are%20paid%20off.">snowball method</a>”). Others focus on high-interest debts (often known as the “<a href="https://www.wellsfargo.com/goals-credit/smarter-credit/manage-your-debt/snowball-vs-avalanche-paydown/#:%7E:text=The%20%22snowball%20method%2C%22%20simply,all%20accounts%20are%20paid%20off.">avalanche method</a>”). Find what works for you. The most important thing is to have a plan and stick to it.</p> <p>Review the terms of each debt carefully. Certain loans offer flexibility in repayment schedules, while others may impose penalties for early settlement. Take note of these conditions as you develop your repayment plan.</p> <p>Debt can be a useful tool or a dangerous trap, depending on how you use it. By understanding the difference between good and bad debts, and by having a smart strategy for paying them off, you can take charge of your financial future.<!-- Below is The Conversation's page counter tag. Please DO NOT REMOVE. --><img style="border: none !important; box-shadow: none !important; margin: 0 !important; max-height: 1px !important; max-width: 1px !important; min-height: 1px !important; min-width: 1px !important; opacity: 0 !important; outline: none !important; padding: 0 !important;" src="https://counter.theconversation.com/content/217779/count.gif?distributor=republish-lightbox-basic" alt="The Conversation" width="1" height="1" /><!-- End of code. If you don't see any code above, please get new code from the Advanced tab after you click the republish button. The page counter does not collect any personal data. More info: https://theconversation.com/republishing-guidelines --></p> <p><a href="https://theconversation.com/profiles/angel-zhong-1204643"><em>Angel Zhong</em></a><em>, Associate Professor of Finance, <a href="https://theconversation.com/institutions/rmit-university-1063">RMIT University</a></em></p> <p><em>Image credits: Getty Images</em></p> <p><em>This article is republished from <a href="https://theconversation.com">The Conversation</a> under a Creative Commons license. Read the <a href="https://theconversation.com/what-are-good-and-bad-debts-and-which-should-i-pay-off-first-217779">original article</a>.</em></p>

Money & Banking

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Forcing people to repay welfare ‘loans’ traps them in a poverty cycle – where is the policy debate about that?

<p><em><a href="https://theconversation.com/profiles/hanna-wilberg-1466649">Hanna Wilberg</a>, <a href="https://theconversation.com/institutions/university-of-auckland-1305">University of Auckland</a></em></p> <p>The National Party’s <a href="https://www.1news.co.nz/2023/09/26/more-sanctions-for-unemployed-beneficiaries-under-national/">pledge to apply sanctions</a> to unemployed people receiving a welfare payment, if they are “persistently” failing to meet the criteria for receiving the benefit, has attracted plenty of comment and <a href="https://www.1news.co.nz/2023/09/26/nationals-benefit-sanctions-plan-cruel-dehumanising-greens/">criticism</a>.</p> <p>Less talked about has been the party’s promise to index benefits to inflation to keep pace with the cost of living. This might at least provide some relief to those struggling to make ends meet on welfare, though is not clear how much difference it would make to the current system of indexing benefits to wages.</p> <p>In any case, this alone it is unlikely to break the cycle of poverty many find themselves in.</p> <p>One of the major drivers of this is the way the welfare system pushes some of the most vulnerable people into debt with loans for things such as school uniforms, power bills and car repairs.</p> <p>The government provides one-off grants to cover benefit shortfalls. But most of these grants are essentially loans.</p> <p>People receiving benefits are required to repay the government through weekly deductions from their normal benefits – which leaves them with even less money to survive on each week.</p> <p>With <a href="https://www.stuff.co.nz/pou-tiaki/132980318/auckland-mother-serves-up-cereal-for-dinner-due-to-rising-food-costs">rising costs</a>, the situation is only getting worse for many of the 351,756 New Zealanders <a href="https://figure.nz/chart/TtiUrpceJruy058e-ITw010dHsM6bvA2a">accessing one of the main benefits</a>.</p> <h2>Our whittled down welfare state</h2> <p>Broadly, there are three levels of government benefits in our current system.</p> <p>The main benefits (such as jobseeker, sole parent and supported living payment) <a href="https://www.workandincome.govt.nz/products/benefit-rates/benefit-rates-april-2023.html">pay a fixed weekly amount</a>. The jobseeker benefit rate is set at NZ$337.74 and sole parents receive $472.79 a week.</p> <p>Those on benefits have access to a second level of benefits – weekly supplementary benefits such as an <a href="https://www.workandincome.govt.nz/products/a-z-benefits/accommodation-supplement.html">accommodation supplement</a> and other allowances or tax credits.</p> <p>The third level of support is one-off discretionary payments for specific essential needs.</p> <p>Those on benefits cannot realistically make ends meet without repeated use of these one-off payments, unless they use assistance from elsewhere – such as family, charity or borrowing from loan sharks.</p> <p>This problem has been building for decades.</p> <h2>Benefits have been too low for too long</h2> <p>In the 1970s, the <a href="https://mro.massey.ac.nz/handle/10179/12967">Royal Commission on Social Security</a> declared the system should provide “a standard of living consistent with human dignity and approaching that enjoyed by the majority”.</p> <p>But Ruth Richardson’s “<a href="https://www.stuff.co.nz/the-press/christchurch-life/124978983/1991-the-mother-of-all-budgets">mother of all budgets</a>” in 1991 slashed benefits. Rates never recovered and today’s <a href="https://www.1news.co.nz/2022/03/29/benefit-increases-will-still-leave-families-locked-in-poverty/">benefits are not enough to live on</a>.</p> <p>In 2018, the <a href="https://www.weag.govt.nz/">Welfare Expert Advisory Group</a> looked at how much money households need in two lifestyle scenarios: bare essentials and a minimum level of participation in the community, such as playing a sport and taking public transport.</p> <p>The main benefits plus supplementary allowances did not meet the cost of the bare essentials, let alone minimal participation.</p> <p>The Labour government has since <a href="https://www.beehive.govt.nz/release/government-delivers-income-increases-over-14-million-new-zealanders">increased benefit rates</a>, meaning they are now slightly above those recommended by the advisory group. But those recommendations were made in 2019 and don’t take into account the <a href="https://www.stats.govt.nz/news/annual-inflation-at-6-0-percent">sharp rise in inflation</a> since then.</p> <p>Advocacy group <a href="https://fairerfuture.org.nz/">Fairer Future</a> published an updated assessment in 2022 – nine out of 13 types of households still can’t meet their core costs with the current benefit rates.</p> <h2>How ‘advances’ create debt traps</h2> <p>When they don’t have money for an essential need, people on benefits can receive a “special needs grant”, which doesn’t have to be repaid. But in practice, Work and Income virtually never makes this type of grant for anything except food and some other specific items, such as some health travel costs or emergency dental treatment.</p> <p>For <a href="https://www.1news.co.nz/2023/02/27/very-stressful-beneficiary-says-he-cant-afford-msd-debt/">all other essential needs</a> – such as school uniforms, car repairs, replacing essential appliances, overdue rent, power bills and tenancy bonds – a one-off payment called an “advance” is used. Advances are loans and have to be paid back.</p> <p>There are several issues with these types of loans.</p> <p>First, people on benefits are racking up thousands of dollars worth of debts to cover their essential needs. It serves to trap them in financial difficulties for the foreseeable future.</p> <p>As long as they remain on benefits or low incomes, it’s difficult to repay these debts. And the <a href="https://www.legislation.govt.nz/act/public/2018/0032/latest/whole.html">Social Security Act 2018</a> doesn’t allow the Ministry of Social Development (MSD) to waive debts.</p> <h2>Contradictory policies</h2> <p>Another problem is that people on benefits have to start repaying their debt straight away, with weekly deductions coming out of their already limited benefit.</p> <p>Each new advance results in a further weekly deduction. Often these add up to $50 a week or more. MSD policy says repayments should not add up to more than $40 a week, but that is often ignored.</p> <p>This happens because the law stipulates that each individual debt should be repaid in no more than two years, unless there are exceptional circumstances. Paying this debt off in two years often requires total deductions to be much higher than $40.</p> <p>The third issue is that one-off payments can be refused regardless of the need. That is because there are two provisions pulling in opposite directions.</p> <p>On the one hand the law says a payment should be made if not making it would cause serious hardship. But on the other hand, the law also says payments should not be made if the person already has too much debt.</p> <p>People receiving benefits and their case managers face the choice between more debt and higher repayments, or failing to meet an essential need.</p> <h2>Ways to start easing the burden</h2> <p>So what is the fix? A great deal could be achieved by just changing the policies and practices followed by Work and Income.</p> <p>Case managers have the discretion to make non-recoverable grants for non-food essential needs. These could and should be used when someone has an essential need, particularly when they already have significant debt.</p> <p>Weekly deductions for debts could also be automatically made very low.</p> <p>When it comes to changing the law, the best solution would be to make weekly benefit rates adequate to live on.</p> <p>The government could also make these benefit debts similar to student loans, with no repayments required until the person is off the benefit and their income is above a certain threshold.</p> <p>However we do it, surely it must be time to do something to fix this poverty trap.<!-- Below is The Conversation's page counter tag. Please DO NOT REMOVE. --><img style="border: none !important; box-shadow: none !important; margin: 0 !important; max-height: 1px !important; max-width: 1px !important; min-height: 1px !important; min-width: 1px !important; opacity: 0 !important; outline: none !important; padding: 0 !important;" src="https://counter.theconversation.com/content/212528/count.gif?distributor=republish-lightbox-basic" alt="The Conversation" width="1" height="1" /><!-- End of code. If you don't see any code above, please get new code from the Advanced tab after you click the republish button. The page counter does not collect any personal data. More info: https://theconversation.com/republishing-guidelines --></p> <p><a href="https://theconversation.com/profiles/hanna-wilberg-1466649"><em>Hanna Wilberg</em></a><em>, Associate professor - Law, <a href="https://theconversation.com/institutions/university-of-auckland-1305">University of Auckland</a></em></p> <p><em>Image credits: Getty Images </em></p> <p><em>This article is republished from <a href="https://theconversation.com">The Conversation</a> under a Creative Commons license. Read the <a href="https://theconversation.com/forcing-people-to-repay-welfare-loans-traps-them-in-a-poverty-cycle-where-is-the-policy-debate-about-that-212528">original article</a>.</em></p>

Money & Banking

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Trapped pensioners told to repay $16,000

<p dir="ltr" style="margin: 0px 0px 5px;padding: 0px;border: 0px;font-size: 16px;vertical-align: baseline">Two New Zealand pensioners stuck in Australia face potentially having to repay their super, after receiving a letter including a $15,000 ($NZD 16,000) from the Ministry of Social Development.</p><p dir="ltr" style="margin: 0px 0px 5px;padding: 0px;border: 0px;font-size: 16px;vertical-align: baseline">“We have stopped your payments and you will need to pay back the money you owe,” the government ministry told the pensioners.</p><p dir="ltr" style="margin: 0px 0px 5px;padding: 0px;border: 0px;font-size: 16px;vertical-align: baseline">Maureen and Rob Wardle, both in their 80s, were shocked to receive the bill after being stuck abroad for nearly a year.</p><p dir="ltr" style="margin: 0px 0px 5px;padding: 0px;border: 0px;font-size: 16px;vertical-align: baseline">“Our New Zealand super was stopped on November 9,” Maureen told the <a style="background-image: initial;background-position: initial;background-size: initial;background-attachment: initial;margin: 0px;padding: 0px;border: 0px;vertical-align: baseline" href="https://www.nzherald.co.nz/business/covid-19-miq-lockout-ministry-of-social-development-wants-16k-back-from-kiwi-couple/IRUE3RPBORGTI5S574DDQQK2WQ/" target="_blank" rel="noopener"><em style="margin: 0px;padding: 0px;border: 0px;vertical-align: baseline">New Zealand Herald</em></a>, explaining the couple’s resulting financial and emotional distress.</p><p dir="ltr" style="margin: 0px 0px 5px;padding: 0px;border: 0px;font-size: 16px;vertical-align: baseline">However, the bigger blow came on December 6, with the delivery of the letter demanding the Wardles repay all the money they received from New Zealand while they were in Australia.</p><p dir="ltr" style="margin: 0px 0px 5px;padding: 0px;border: 0px;font-size: 16px;vertical-align: baseline">Having left New Zealand last April, the couple have exceeded the maximum 26 weeks New Zealand pensioners are allowed to be overseas while continuing to receive their super.</p><p dir="ltr" style="margin: 0px 0px 5px;padding: 0px;border: 0px;font-size: 16px;vertical-align: baseline">As a result, Mr Wardle now owes $7139.81 and Mrs Wardle owes $7936.76, totalling $15076.57.</p><p dir="ltr" style="margin: 0px 0px 5px;padding: 0px;border: 0px;font-size: 16px;vertical-align: baseline">With no super coming from the New Zealand government over the last three months and no Australian support for people in similar situations, the couple say all their money has been spent surviving abroad, leaving none to repay their debt.</p><p dir="ltr" style="margin: 0px 0px 5px;padding: 0px;border: 0px;font-size: 16px;vertical-align: baseline">“As you can imagine, all this has been a huge worry for us. We are in our 80s and not computer savvy,” Mrs Wardle said.</p><p dir="ltr" style="margin: 0px 0px 5px;padding: 0px;border: 0px;font-size: 16px;vertical-align: baseline">“We just want to go home to go into Work and Income and talk to someone in person.”</p><p dir="ltr" style="margin: 0px 0px 5px;padding: 0px;border: 0px;font-size: 16px;vertical-align: baseline">The couple received the December 6 letter from an international customer service officer based in Wellington.</p><p dir="ltr" style="margin: 0px 0px 5px;padding: 0px;border: 0px;font-size: 16px;vertical-align: baseline">The letter read: “We always want to make sure we get it right for people so we recently reviewed your payments after we found you’d left the country on 25/04/21 on flight number NZ149.</p><p dir="ltr" style="margin: 0px 0px 5px;padding: 0px;border: 0px;font-size: 16px;vertical-align: baseline">“Because you received New Zealand superannuation, we can continue to pay you for the first 26 weeks you’re overseas as long as you return within 30 weeks. If you don’t return within the 30 weeks, we will have to stop your New Zealand superannuation from the day after you left the country.</p><p dir="ltr" style="margin: 0px 0px 5px;padding: 0px;border: 0px;font-size: 16px;vertical-align: baseline">“We wrote to you about this on 27/10/21 and I’m getting back in touch to let you know we paid you too much. You need to pay some money back. From 26/04/21 to 09/11/21, unfortunately, you received money from us you didn’t qualify for because you were overseas.”</p><p dir="ltr" style="margin: 0px 0px 5px;padding: 0px;border: 0px;font-size: 16px;vertical-align: baseline">To make the situation more stressful, Mrs Wardle said she is worried about how the couple will continue to afford to live, with the closed New Zealand borders meaning they still can’t go home.</p><p dir="ltr" style="margin: 0px 0px 5px;padding: 0px;border: 0px;font-size: 16px;vertical-align: baseline">New Zealand opposition revenue spokesman Andrew Bayly expressed deep concern about the couple, saying that situations like theirs should never have been able to occur.</p><p dir="ltr" style="margin: 0px 0px 5px;padding: 0px;border: 0px;font-size: 16px;vertical-align: baseline">Mr Bayly has been working with a number of Kiwi pensioners in similar situations to the Wardles, with some trapped in Australia and one couple in Morocco.</p><p dir="ltr" style="margin: 0px 0px 5px;padding: 0px;border: 0px;font-size: 16px;vertical-align: baseline">“The issue of superannuitants who are stuck overseas and have been unable to get a spot in MIQ (Managed Isolation and Quarantine) is widespread. In fact, I would imagine virtually all electorate MPs have been approached by superannuants caught in this difficult situation,” he said.</p><p dir="ltr" style="margin: 0px 0px 5px;padding: 0px;border: 0px;font-size: 16px;vertical-align: baseline">“Given many seniors rely on their super to pay for their living costs, it is appalling that there is such a merciless approach that many superannuitants face the prospect of having their super cut off or, in some cases, having to refund their super.”</p><p dir="ltr" style="margin: 0px 0px 5px;padding: 0px;border: 0px;font-size: 16px;vertical-align: baseline">The Wardle's situation comes after news of New Zealanders in similar situations who are struggling to return home via the country’s quarantine system, which enables Kiwis to book spots in government-run quarantine facilities.</p><p dir="ltr" style="margin: 0px 0px 5px;padding: 0px;border: 0px;font-size: 16px;vertical-align: baseline">In their case, Mrs Wardle said they went to Australia so her husband could undergo surgery.</p><p dir="ltr" style="margin: 0px 0px 5px;padding: 0px;border: 0px;font-size: 16px;vertical-align: baseline">While he was recovering, the borders unexpectedly closed.</p><p dir="ltr" style="margin: 0px 0px 5px;padding: 0px;border: 0px;font-size: 16px;vertical-align: baseline">They were able to return to New Zealand for just one week in April, before flying back to Australia for more surgery.</p><p dir="ltr" style="margin: 0px 0px 5px;padding: 0px;border: 0px;font-size: 16px;vertical-align: baseline">When asked whether they could have returned while the trans-Tasman bubble was in operation in July, she said sickness prevented them from leaving the country.</p><p dir="ltr" style="margin: 0px 0px 5px;padding: 0px;border: 0px;font-size: 16px;vertical-align: baseline">“Unfortunately my husband has an aortic aneurysm which has caused multiple surgeries. He had another endoleak and went into hospital again on July 21 for transcatheter therapy for embolisation with angiography.</p><p dir="ltr" style="margin: 0px 0px 5px;padding: 0px;border: 0px;font-size: 16px;vertical-align: baseline">“Our New Zealand pension is our main source of income as the interest rates are so low on investments so we have become dependent on it [and] you can imagine our distress when it was cut off for no fault of our own,” she said.</p><p dir="ltr" style="margin: 0px 0px 5px;padding: 0px;border: 0px;font-size: 16px;vertical-align: baseline">“We have found it physically impossible to get back to New Zealand in the time frames due to Covid.”</p><p dir="ltr" style="margin: 0px 0px 5px;padding: 0px;border: 0px;font-size: 16px;vertical-align: baseline">George van Ooyen, the ministry’s client service support group general manager, said applications for super to extend beyond 26 weeks were being considered on a “case-by-case basis”.</p><p dir="ltr" style="margin: 0px 0px 5px;padding: 0px;border: 0px;font-size: 16px;vertical-align: baseline">“This is available to people whose absence from New Zealand is solely linked to the travel bubble closure, and it will continue as long as it is needed,” he said.</p><p dir="ltr" style="margin: 0px 0px 5px;padding: 0px;border: 0px;font-size: 16px;vertical-align: baseline">“We encourage New Zealanders overseas to contact us and discuss how we may be able to help within the parameters of discretion legislation allows us.”</p><p dir="ltr" style="margin: 0px 0px 5px;padding: 0px;border: 0px;font-size: 16px;vertical-align: baseline"><em style="margin: 0px;padding: 0px;border: 0px;vertical-align: baseline">Image: The New Zealand Herald</em></p>

Money & Banking

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Man ordered to repay $201,000 “inheritance” to the bank

<p><span style="font-weight: 400;">A grandfather has been left shocked by his bank, after they have ordered him to repay $201,000.</span></p> <p><span style="font-weight: 400;">Russell Alexander, 54, contacted Barclay’s Bank after huge sums of money were deposited into his account. </span></p> <p><span style="font-weight: 400;">Confused by the large sum, he reached out to Barclay’s and got no reply. </span></p> <p><span style="font-weight: 400;">Eventually, representatives from the bank told Russell that the money was part of an inheritance and to keep it, he told </span><a href="https://www.thesun.co.uk/news/16694791/handyman-renovated-home-barclays-mistake/"><span style="font-weight: 400;">The Sun</span></a><span style="font-weight: 400;">. </span></p> <p><span style="font-weight: 400;">He used the money to renovate a fixer-upper house he purchased after his divorce, and could now make more expensive changes to his renovation project. </span></p> <p><span style="font-weight: 400;">However, nine months after the money first hit Russell’s account, Barclay’s realised they had made a mistake and took all the money back, including an extra $11,000 of Russell’s own money. </span></p> <p><span style="font-weight: 400;">Due to the brash withdrawal of funds, Russell has been left living in a semi-derelict home with no heating, and no money to improve his situation. </span></p> <p><span style="font-weight: 400;">Barclay’s admitted that the money was transferred to Russell by accident, and he was “incorrectly advised that he could keep the funds”.</span></p> <p><span style="font-weight: 400;">Russell said, “I’m totally outraged at their offer of £500 ($A1000) compensation.</span></p> <p><span style="font-weight: 400;">“I’ve been a loyal customer for 40 years and they clearly told me twice the money was mine to spend.”</span></p> <p><span style="font-weight: 400;">“I planned to renovate the house to rent out rooms on Airbnb, but I’ll need to work now to earn the money and it will take years.”</span></p> <p><span style="font-weight: 400;">“I never would have bought it if I didn’t have the extra money.”</span></p> <p><span style="font-weight: 400;">“Barclays have stolen my future plans and left me living like a stowaway.”</span></p> <p><em><span style="font-weight: 400;">Image credits: Shutterstock</span></em></p>

Money & Banking

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How Australians live with debt they can't repay

<p>Two thirds of Australian adults feel <a href="http://www.csi.edu.au/media/Financial_Resilience_Part_One.pdf">financially insecure</a>. Almost one in two have less than three months’ income saved, and almost one in three have less than one month’s income. One in seven have negligible or no savings, meaning that <a href="http://financialrights.org.au/wp-content/uploads/2017/02/FRLC-Factsheet-Financial-Hardship.pdf">financial hardship</a> – being unable to pay debts when they fall due – is just a bill away.</p> <p>This is something that rightly concerns policy makers. Yet for all the attention given to the problem – for example, in the recently completed Senate <a href="https://www.aph.gov.au/Parliamentary_Business/Committees/Senate/Economics/Creditfinancialservices">inquiry into financial services</a> targeted at Australians at risk of financial hardship – there is little empirical research on the topic in Australia to help inform policy responses.</p> <p>To address this gap, we conducted Australia’s first large-scale study on the experiences of people in financial hardship. We <a href="https://papers.ssrn.com/sol3/papers.cfm?abstract_id=3275131">surveyed</a> 1,101 Australian adults who had been unable to pay a debt when it fell due within the previous two years.</p> <p>The results must be interpreted carefully, as certain groups – such as people who spoke a language other than English at home, and people aged under 25 – were underrepresented.</p> <p>Nonetheless, our findings clearly contradict a popular belief that debt problems are mostly due to poor choices. They also shed light on the profound impact that financial hardship – from temporary shortfalls in earnings to severe and ongoing deprivation – has on health, relationships and overall quality of life.</p> <p><strong>Key survey groups</strong></p> <p>Of our 1,101 respondents:</p> <ul> <li>480 (43.6 per cent) were “wage recipients”, their main source of income being wages paid by an employer.</li> <li>402 (36.5 per cent) were “Centrelink recipients”, their income coming primarily from social security payments (for example, the Newstart Allowance for the unemployed, the Disability Support Pension, or the Age Pension).</li> <li>76 (6.9 per cent) received both wages paid by an employer and a Centrelink payment.</li> <li>143 (13.0 per cent) had income coming from other sources, such as earnings from their own business, superannuation, and financial assistance from family or friends.</li> </ul> <p>The median income for Centrelink recipients was $19,981. For wage recipients, it was $44,876.</p> <p>The large representation of wage recipients in our sample shows that employment is no guarantee against financial hardship. Nor is educational attainment, with more than one third of wage recipients in our survey having a bachelor’s degree or higher.</p> <p><strong>Tipping points for financial hardship</strong></p> <p>We asked respondents about their experiences in the year before they fell behind with repayments. The most common experiences were unemployment and underemployment, as well as physical and mental health problems. Significantly less prevalent were factors such as gambling or alcohol and drug addiction.</p> <p><img src="https://images.theconversation.com/files/260641/original/file-20190225-26149-1vovm1g.png?ixlib=rb-1.1.0&amp;q=45&amp;auto=format&amp;w=754&amp;fit=clip" alt="" /> <span class="caption"></span> <span class="attribution"><a href="https://datawrapper.dwcdn.net/9GgqH/2/" class="source">datawrapper</a>, <a href="http://creativecommons.org/licenses/by/4.0/" class="license">CC BY</a></span></p> <p>These results suggest financial hardship can affect anyone, regardless of how personally disciplined they are.</p> <p>As one respondent told us: “I’m not badly off ($70,000 a year), but I’ve developed two autoimmune conditions on top of a preexisting neurological condition. Medication is expensive, and so are consultations with specialists […] I know how to manage my money, but there are more costs than money coming in […] It’s taught me not to judge people with money problems.”</p> <p><strong>Less income, more hardship</strong></p> <p>Falling behind with repayments was a stressful and isolating experience for our respondents, no matter their level of income.</p> <p>But Centrelink recipients are far more vulnerable, as their incomes leave no margin for unexpected expenses.</p> <p>“The reason we got in trouble was because the car broke down,” explained one respondent living on a Disability Support Pension. “It was just before Christmas, and all the bills came in together.”</p> <p><img src="https://images.theconversation.com/files/260860/original/file-20190225-26156-14e8fo.png?ixlib=rb-1.1.0&amp;q=45&amp;auto=format&amp;w=754&amp;fit=clip" alt="" /> <span class="caption"></span> <span class="attribution"><a href="https://datawrapper.dwcdn.net/mLs3s/6/" class="source">datawrapper</a>, <a href="http://creativecommons.org/licenses/by/4.0/" class="license">CC BY</a></span></p> <p>Respondents told us that being in debt negatively affected their health, relationships, community involvement, and ability to look for work or finish their education.</p> <p>“It’s the anxiety,” said one respondent. “Not knowing from week to week whether the debts will all be able to be paid.”</p> <p><strong>Coping by cutting down</strong></p> <p>Most of our respondents sought to cope with their situation by reducing spending on food, recreation, utilities, medical care and transport. Just over a third borrowed money from family or friends.</p> <p><img src="https://images.theconversation.com/files/260947/original/file-20190226-150718-1fomun6.png?ixlib=rb-1.1.0&amp;q=45&amp;auto=format&amp;w=754&amp;fit=clip" alt="" /> <span class="caption"></span> <span class="attribution"><a href="https://datawrapper.dwcdn.net/USaYR/3/" class="source">datawrapper</a>, <a href="http://creativecommons.org/licenses/by/4.0/" class="license">CC BY</a></span></p> <p>Many wage recipients mentioned cutting down on “extravagances” such as restaurants, alcohol and take-away foods. However, higher proportions of Centrelink recipients were forced to cut down on essentials such as food, heating and medical care.</p> <p>“I do not have any money for food,” said one respondent living on the Newstart Allowance. “I never thought we would be in this situation.”</p> <p><strong>Assistance for low-income debtors</strong></p> <p>Consumer protection laws allow Australians in financial hardship to negotiate moratoriums, payment plans and other arrangements (sometimes known as “<a href="http://www.ndh.org.au/Debt-solutions/Negotiate-payment-terms">hardship variations</a>”) with creditors including banks, energy, water and telecommunications companies.</p> <p>But just a quarter of our respondents used these provisions to obtain a hardship arrangement from an energy or water company, and only 14.3 per cent used them to obtain assistance from a bank or other credit provider.</p> <p>It is also questionable whether low-income debtors benefit from such arrangements, which tend to be very short-term.</p> <p>Our results indicate a need to broaden the accessibility of assistance for low-income debtors – for example, by increasing funding for free <a href="https://www.financialcounsellingaustralia.org.au/Corporate/Find-a-Counsellor">financial counselling</a> services.</p> <p>Another measure, recommended by the <a href="https://www.acoss.org.au/wp-content/uploads/2018/09/DAE-Analysis-of-the-impact-of-raising-benefit-rates-FINAL-4-September-...-1.pdf">Australian Council of Social Service</a> <a href="http://ceda.com.au/Research-and-policy/All-CEDA-research/Research-catalogue/How-unequal-Insights-on-inequality">and</a> <a href="https://salvos.org.au/about-us/news-and-stories/media-newsroom/its-time-to-kick-start-newstart/">others</a>, is increasing the amount of Newstart and other Centrelink allowances.</p> <p>Financial hardship can affect almost anyone. However, severe and ongoing debt problems are an inevitability for Australians whose incomes are simply too low to meet the cost of living.<!-- Below is The Conversation's page counter tag. Please DO NOT REMOVE. --><img style="border: none !important; box-shadow: none !important; margin: 0 !important; max-height: 1px !important; max-width: 1px !important; min-height: 1px !important; min-width: 1px !important; opacity: 0 !important; outline: none !important; padding: 0 !important; text-shadow: none !important;" src="https://counter.theconversation.com/content/105296/count.gif?distributor=republish-lightbox-basic" alt="The Conversation" width="1" height="1" /><!-- End of code. If you don't see any code above, please get new code from the Advanced tab after you click the republish button. The page counter does not collect any personal data. More info: http://theconversation.com/republishing-guidelines --></p> <p><em>Written by <span>Evgenia Bourova, Research Fellow (Financial Hardship Project), University of Melbourne; Ian Ramsay, Professor, Melbourne Law School, University of Melbourne, and Paul Ali, Associate professor, University of Melbourne</span>. Republished with permission of <span><a href="https://theconversation.com/what-1-100-australians-told-us-about-the-experience-of-living-with-debt-they-cant-repay-105296">The Conversation</a></span>.</em></p>

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Why disqualified pollies won’t have to repay their salaries

<p>For months now, Canberra has been rocked by a scandal that’s seen eight MPs and senators stripped of their jobs after failing to disclose (and renounce) their dual citizenships prior to running for office.</p> <p>As the embarrassing saga continues, many Australians want to know if the affected pollies will be forced to repay their salaries, given they breached the constitution when entering their seats.</p> <p>The average backbencher’s salary stands at around $200,000 – not to mention entitlements and superannuation – but it seems those caught up in the scandal will not be made to reimburse taxpayers.</p> <p>The reason why is a little complicated, the <a href="http://www.abc.net.au/news/2017-11-14/citizenship-saga:-will-mps-have-to-repay-salaries/9150052" target="_blank"><strong><span style="text-decoration: underline;">ABC explains</span></strong></a>.</p> <p>“Back in 1907, the High Court ruled that any votes made on legislation still stand, even after a member is booted from parliament,” writes political reporter Jane Norman.</p> <p>“So a disqualified member’s service is still recognised. Even though they were not supposed to be there, they were still doing their job."</p> <p>Despite the disqualified MPs’ combined salaries totalling millions of dollars, in terms of the federal budget ($465 billion), it means very little.</p> <p>In addition, the Commonwealth argues that the same amount of money would have been spent regardless. “Whoever filled that Lower House seat or Senate spot would have been paid a salary with entitlements and superannuation, so it is basically budget neutral," Norman explains.</p> <p>Tell us in the comments below, do you think the politicians caught up in the dual citizenship scandal should be made to repay their salaries?</p>

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