How to Create a Debt Repayment Plan That Works
Creating a debt repayment plan that works involves understanding your financial situation, setting realistic goals, and utilising available resources. In this guide, we’ll explore various strategies and options tailored for the local market, including formal arrangements like Debt Repayment Orders (DROs) and informal methods.
Understanding Your Financial Situation
Before creating a repayment plan, it’s essential to have a clear picture of your financial situation. This involves:
- Listing Debts: Identify all your debts, including amounts, interest rates, and due dates.
- Assessing Income and Expenses: Calculate your monthly income and essential expenses to determine how much you can allocate towards debt repayment.
- Identifying Priorities: Prioritise debts based on interest rates and penalties to minimise costs.
Setting Realistic Goals
Once you understand your financial situation, set achievable goals:
- Short-term Goals: Focus on paying off high-interest debts first.
- Long-term Goals: Aim to become debt-free within a specific timeframe, such as three to five years.
Formal Debt Repayment Options
Debt Repayment Order (DRO)
A DRO is a formal arrangement that can be beneficial if you owe less than $50,000 in unsecured debt and can make some repayments over time. Here’s how it works:
- Application Process: You can apply for a DRO through the New Zealand Insolvency and Trustee Service. A DRO Supervisor will work with you and your creditors to arrange the details and payments.
- Repayment Terms: Typically, a DRO allows repayment over three years, but this can vary. It protects you from legal action and additional penalties during this period.
- Eligibility: You must be unable to pay your debts immediately but able to make regular payments. Certain debts like student loans and fines are excluded.
Instalment Arrangements with Inland Revenue
For tax-related debts, you can set up an instalment arrangement with Inland Revenue:
- Flexibility: Choose weekly, fortnightly, or monthly payments based on your ability to pay.
- Application: Apply through the myIR service, where you can customise your payment schedule.
Informal Debt Repayment Strategies
Budgeting and Expense Management
- Create a Budget: Track your income and expenses to identify areas where you can cut costs.
- Emergency Fund: Build a small emergency fund to avoid falling back into debt for unexpected expenses.
Negotiating with Creditors
- Open Communication: Contact creditors to negotiate lower interest rates or extended payment terms.
- Debt Consolidation: Consider consolidating multiple debts into a single loan with a lower interest rate.
Seeking Professional Advice
- Financial Counselling: Engage with financial advisors or community organisations like the Citizens Advice Bureau for guidance and support.
- Community Law Services: Access free legal advice on debt-related issues through Community Law Centres.
Monitoring and Adjusting Your Plan
Regularly review your debt repayment plan to ensure it aligns with your financial situation:
- Track Progress: Monitor your repayments and adjust your budget as necessary.
- Stay Informed: Keep up-to-date with any changes in financial regulations or support services that may benefit your situation.
Creating a debt repayment plan requires careful planning and commitment. By understanding your options and utilising available resources, you can effectively manage and eventually eliminate your debt.