Weighed down by debt? There's relief

Last month, The Sunday Times outlined important changes to the rules of unsecured lending - such as credit cards - meaning a person may borrow a maximum of 18 times his monthly pay. The changes took effect on June 1. We now look at how people get into debt and how debt management plans can help them.

Most people think you have to be a big spender before racking up large debts. This is not always true, as some borrowers will attest. A small debt, if left unattended, can fester like a wound and grow slowly into a financial monster.

And lots of small purchases on credit can add up to become quite a headache before you know it.

Financial experts say the root causes of why people accumulate debt vary. But one thing they have in common is the inability to control their spending before it spirals into a big debt.

There are three initiatives available to help debtors get out of their financial rut.

The latest is the Debt Consolidation Plan (DCP) offered by 14 financial institutions since January. The other two are the Debt Management Programme (DMP) by Credit Counselling Singapore (CCS) since 2004, and the Debt Repayment Scheme (DRS), an alternative to bankruptcy.

CCS is a registered charity and an agency that assists people with unsecured-debt problems.

Besides these schemes, financial advisers are able to help borrowers resolve their problems by coming up with a viable and comprehensive financial plan that aids in paying down the debt while ensuring a stable future.

Here are real-life case studies on how three individuals incurred debt and resolved it.

Case 1: $240,000 in interest payments alone

Thomas (not his real name), 50, claimed that he was not a big spender by normal standards. He wasn't buying branded goods or indulging in fine dining.

But he was spending freely and carelessly on his credit card because back in the 1990s, it was a big deal to be seen using a credit card. To many, it was a status symbol.

"I didn't think of the consequences of using the credit card. I would rack up household expenses of $500 on my card and I'd tell myself I could just pay it back in the future... But a $1,000 debt became $2,000 and then $3,000," said Thomas, who works in the carpentry industry. And soon, his total debt had snowballed to $58,000.

One day, it dawned on him that he could not pay off his debt. So he took another card and rolled his outstanding balances to that card. At one point, he was rolling his balances among five banks including Citibank and HSBC.

All this started in 1991, when Thomas paid only half of his credit card bills or the minimum sums, instead of the full outstanding amount. The interest alone amounted to an average of $800 each month.

He worked out that he had paid about $240,000 over the last 25 years to cover the interest portion of his outstanding balances, and his debt is still outstanding.

Early this year, HSBC informed him of the DCP, which targets debtors with more than 12 months' outstanding unsecured debt.

HSBC's promotional rate then was 8.5 per cent per year. Its DCP interest rate is now between 13.8 per cent and 14.8 per cent. Other banks are charging between 8.5 per cent and 15.82 per cent.

Under the DCP, eligible borrowers like Thomas can reduce their debt burden and consolidate their outstanding balances across various banks, by nominating one participating financial institution to gather together all their debts.

Thomas' monthly DCP payment to HSBC is about $1,200, which is less than half of his pay. He is also permitted to hold one credit card with HSBC, which he uses only to pay for petrol and groceries.

Under this plan, his total debt will be paid off in five years' time.

"The DCP is a relief... Without the DCP, I wouldn't have survived. I've learnt my lesson. Just have one card and make sure I pay in full," he said.

Thomas is married with three children, and his wife is unaware of his debt burden.


Case 2: 'If a loan is not necessary, don't take it'

Bernard (not his real name), 48, used to have sleepless nights over his mounting debt problems. With a debt that snowballed to $150,000, he had run out of ideas on how to climb out of the bottomless pit he had dug for himself.

Bernard works in the education sector and is married with three children aged 12, nine and three.

His lifeline came in the form of the DMP run by CCS in 2009.

His financial nightmare started in 2004, a few years after he had switched to a lower-paying job, got married and bought a flat.

The double whammy of a fall in disposable income and the higher costs that came with being the family's sole breadwinner led to him racking up hefty credit card bills.

At one point, he had 12 credit cards. And, to make matters worse, when he exhausted his plastic, he turned to other unsecured credit lines like cash lines.

He likened his financial problem to that of turning on a tap. But in his case, even after he turned it off, the water still flowed. Over time, the debt became so big he did not know which part was the principal sum.

"Being a sole breadwinner is very tough. The debt accumulated slowly over the months and built up. At one point, 80 to 90 per cent of my pay went to the banks as I was trying to keep up with the minimum sum payments on my credit card bills.

"The nights were the worst. I felt stressed when I was left to myself in the dark worrying over how to pay my debts," recalled Bernard.

At CCS, he underwent a compulsory counselling session before starting on the DMP. The impact was immediate.

Before the programme, Bernard was coughing up $4,000 every month to the banks.

Under DMP, his monthly instalments were a much lower $2,400 and they were reduced as the outstanding loan was gradually paid off.

This is because the annual interest rate negotiated by CCS with the banks is a single-digit rate, much lower than the 24 per cent to 28 per cent that bank customers are subject to on their outstanding credit card balances.

CCS helped Bernard liaise with the banks, and worked out a payment schedule for each bank he owed money to.

As part of the process, Bernard was asked to sell his car as well - unfortunately at a loss - which added to the outstanding debt amount because he had borrowed money to buy it.

His wife was a pillar of support, helping Bernard to monitor and deliver his payments physically to the bank branches whenever they were due.

Last August, he completed the debt repayment programme successfully and became debt-free.

With the nightmare behind him, Bernard said: "It taught me a great deal that having a loan is not good. If a loan is not necessary, don't take it. I realised how important it is to manage my funds properly as well as curbing my inner self not to succumb to temptations of spending, just because I have a credit card."

These days, a debit card is enough for Bernard.


Case 3: Restructuring a $650,000 burden

As a working professional in a multinational company (MNC) in the finance sector, Henry (not his real name), 38, earns a six-figure annual income. With his high earning power, he qualifies for many overdraft and unsecured credit facilities.

But this is not necessarily a good thing, as Henry discovered.

Owing to stock market losses, Henry - who is married with two young children - took to borrowing. Over 10 years, he accumulated a total debt of $650,000, inclusive of the compounding interest accrued on the loans.

He said: "This ballooned to more than $10,000 just to pay the monthly minimum sums on my credit card bills... I was living pay cheque to pay cheque without any emergency funds to handle any extra expenses. This was made worse when the debts were increasing with the high compounding interest of 24 per cent per annum."

His decade-long lonely and isolated journey together with the growing financial stress and fatigue caused Henry to burn out and he eventually became jobless.

To get out of his desperate plight, bankruptcy was an option. Suicide was also not far from his mind. But Henry still harboured a strong desire for a bright future and wanted to provide a better life for his family. This gave him the courage to come clean about his debt problem with his family.

Through the recommendation of a close friend, he engaged Ms Adeline Tan, financial advisory director at SingCapital, in 2012. Knowing that it would be a long journey, Ms Tan started the process by taking stock of all of Henry's debts and began to restructure them.

Throughout the debt restructuring and repayment process, Henry again thought of opting for bankruptcy as it seemed like an easy way out.

However, Ms Tan advised that bankruptcy carries many implications as well as a social stigma. For instance, most MNCs are unlikely to hire a bankrupt, which would cripple Henry's future prospects and earning ability. Her recommendation was to leave the bankruptcy route as a last resort, until all other options had been exhausted.

With his family's strong support and encouragement, Henry persevered. After taking stock of the entire situation, he decided to sell his property as part of the repayment solution. This meant moving back to live with his parents.

Seeing his commitment to turn over a new leaf and stick to the repayment process, Henry's in-laws also chipped in by selling their only property, and they moved into a rented apartment.

The total debt was reduced from $650,000 to $150,000, which made things more manageable.

Ms Tan said: "While some may think that Henry is lucky to have a family who has property and is willing to sell it, it is also about reviewing your resources and not underestimating family support."

Henry then found a new job with another MNC, which provided the much needed monthly cash flow to repay the debts.

Two years later, his finances permitted him to buy a new private property where he lived together with his in-laws.

Early this year, he became debt-free.

Henry said: "Today, I'm free of sleepless nights worrying about debt repayment and the constant stress of avoiding detection from my family and friends, as well as the accumulated fatigue from putting up a false front, not to mention having to deal with the daily guilt and self-doubt."

Ms Tan said: "Most importantly, Henry learnt the importance of financial planning through this painful period. He has put in place a retirement plan, a children's education plan and an investment plan. All his existing assets are also protected and outstanding liabilities, such as the housing loan, are taken care of in the event of premature death or illness."

Lorna Tan

A version of this article appeared in the print edition of The Sunday Times on July 02, 2017, with the headline 'Weighed down by debt? There's relief'. Print Edition | Subscribe