Go to content

Credit law toolkit

Financial hardship

In this section

How To Guide: Home Loans, Credit Cards and Personal Loans

So what is financial hardship?

Financial hardship is any situation where the consumer is having difficulty repaying his/ her loan.

There are four types of financial hardship:

  1. Financial hardship that fits within the definition of financial hardship under the Credit Law
  2. Financial hardship that fits within the definition of a Code of Practice and the Credit Law
  3. Financial hardship that does not fit under the Credit Law but a Code of Practice does apply
  4. Financial hardship where neither the Credit Law nor any Code of Practice applies

Dealing with financial hardship will usually involve a negotiation between you and the credit provider to agree to an arrangement where your client can repay the loan. You can ask for a whole range of solutions for your client.

Financial hardship under the Credit Law has certain requirements that must be met. The advantage is the consumer’s request for financial hardship under the Credit Law can be determined by EDR (or enforced by the court) if the credit provider refuses the request and the request complies with the criteria set out in the law.

Requirements to obtain financial hardship under the Credit Law

The criteria below assumes that if the dispute is unresolved you will go to EDR (if you are considering enforcing in court get legal advice)

There are four requirements to be met:

  1. The amount in dispute (not the loan amount) must be under the relevant compensation limit for EDR. The amount in dispute is the amount of the repayments being reduced over the time they are being reduced. For example, if the variation is to reduced repayment of $4,000 for 3 months then the amount in dispute is $12,000. The EDR compensation limits are $309,000 for FOS and CIO. Therefore, it is very unlikely that any request for hardship in EDR will be over the compensation limit.
  2. The consumer must be having trouble making their loan repayments (s. 72(1) NCC).
  3. There must be a reasonable cause for the financial hardship e.g. Illness or unemployment
  4. If the variation was made as requested, the consumer must “reasonably expect” to be able to discharge their obligations (s. 72(1) NCC).

Do I decide to request financial hardship under the Credit Law?

Some guidelines are:

  • Any type of arrangement can be requested under the Credit Law so it is recommended that all requests be made under the Credit Law. Note: that a request for hardship does not need to specifically mention the Credit Law.
  • Take into account the rules of the EDR scheme that the credit provider belongs to and any applicable Code of Practice.
  • Remember that any hardship notice needs to demonstrate that the loan would still be repaid (if granted)
If this request is rejected and legal action is imminent then you need to make a revised request under the Credit Law to EDR urgently.

Multiple debts

Many consumers have more than one debt. Not all debts are created equal. Secured debt (particularly a home loan) is a higher priority debt than a credit card. This is because the consumer is at risk of losing their home if they do not pay their home loan.

For this reason, a useful strategy is often to reduce the payments on the credit card so the consumer can make their usual (or close to usual) repayments to their home loan.

Below is the priority of debts chart which is a guide only. It is possible for lower priority debts to become higher priority, for example, if the credit provider obtains a judgment and bankruptcy is threatened (which may put the home at risk). Therefore, it is necessary to keep reviewing the priorities.

Priority debts (in order of priority):

  1. Home loan
  2. Car loan where the car is required for earning income
  3. Council rates or strata fees where there are significant arrears
  4. Utilities if the person is dependent on life support
  5. Judgment debts over $5,000
  6. Other car loans
  7. Utilities
  8. Council rates
  9. Personal loans
  10. Credit cards
  11. Other debts
  12. Debts to friends & family

The other important part of requesting hardship on multiple debts is to reduce the amount of debts on which you need to request hardship. This means if your client can make the minimum repayments on some of the debts they should do so and then request hardship on a few debts only. This cuts down on the number of debts where hardship is being negotiated.

Multiple hardship variations

The consumer can have multiple requests for hardship assistance over the course of a loan. There is nothing in the law to prevent this. The only difficulty is that the more often the consumer requests hardship assistance the harder it is to show that the consumer will be able to reasonably repay the loan. Steps to make a repayment arrangement on the grounds of hardship

Step 1 Tell the consumer to regularly pay what they can afford to the debt (and keep paying)!
Step 2 Questions to answer:
  • Does the Credit Law apply? (See Credit Law overview)
  • Does it meet the requirements to get a variation on the grounds of hardship under the Credit Law?
  • Is there a relevant Code of Practice? The relevant Codes of Practice are:
  • Does the client have reasonable prospects of being able to pay the debt in the future?
  • Are there any higher priority debts?
  • How much can the client afford to pay?
Step 3 Call the credit provider and request a financial hardship arrangement or send a letter requesting financial hardship

(see Sample letter: Financial hardship (credit law)).

Keep a copy of the letter. Make sure the consumer understands what is being requested and is paying the amount offered. Diarise for 21 days into the future for a response to be received (although do not wait if legal action is threatened or has commenced). A response with reasons must be sent within a certain time frame. See Debt collection.

If the Credit Law does not apply, check if a Code of Practice applies. The relevant sections of the Codes of Practice are below. It is strongly recommended you review the requirements. Relevant sections are:

  • Code of Banking Practice – Financial hardship (s. 28); Responding to disputes (s. 37)
  • Customer Owned Banking Code of Practice –Financial Difficulties (s. 24); Responding to disputes (s. 28)
  • MFAA Code of Practice – Hardship applications (s.13); Responding to complaints (s. 11)
Step 4 If accepted, make sure the consumer understands the arrangement and confirm the hardship arrangement in writing. If rejected or no response, go to EDR.

EDR is the main way of resolving disputes under the Credit Law. As EDR is free and both EDR schemes can make determinations in hardship disputes then it is far preferable to go to EDR rather than court.

Note: EDR Schemes cannot make a determination of hardship disputes unless the Credit Law applies. If it does not apply then the EDR Scheme can only review the dispute, it cannot make a binding determination on the credit provider. EDR can make a determination in relation to whether the credit provider has breached a relevant Code of Practice. It can also assist you or your client to negotiate with the credit provider.

If any of the following is happening, you should consider filing in EDR:

  • Negotiation with the credit provider has failed
  • The credit provider is threatening legal action including repossession
  • The credit provider has issued a summons or Statement of Claim

If the credit provider has issued legal proceedings, you must file in EDR before the credit provider obtains judgment. After judgment, EDR cannot consider the dispute except in very limited circumstances (See Financial hardship).

If you are concerned about imminent legal action or a statement of claim/summons has been served you should file in EDR immediately!

Follow up

If you are continuing to work with your client through the period of the hardship variation, then it is a good idea to monitor their situation to ensure that:

  • They are sticking to the arrangement if they are required to make payments and
  • That they are taking steps to address their situation in the longer term

If you are not going to be working further with the client, make sure the client understands that:

  • S/he must keep to the arrangement or the credit provider may commence enforcement action
  • S/he must use the period of the hardship variation to take steps to improve their situation, such as paying down other debts, or looking for work, or claiming on their insurance, or whatever is appropriate to their circumstances (of course clients suffering financial hardship as a result of temporary illness or accident may not need to do this)
  • S/he will not necessarily be notified at the end of the agreed arrangement that it is time to resume normal repayments, the first they may hear about could be a default notice
  • If s/he cannot resume normal repayments at the end of the agreed arrangement they should apply for hardship again, preferably before they go into default by missing a normal repayment
  • Another request for hardship will not necessarily be approved; in fact, it will get more difficult each time they apply

Specific strategies depending on the type of loan

Home loans

Why home loans are important

The home is the consumer’s shelter. It is the highest priority payment they need to make!

An important aspect about home loans is that it is almost always the consumer’s largest debt. This means that if interest is not covered by repayments the debt will grow and compound.

If possible:

  • The best option is that the consumer continues to make the required repayments on their home loan and make hardship arrangements on other debts
  • If this is not possible, then the consumer should at least try to cover the interest
  • Moratoriums (where the consumer does not make repayments at all) should be avoided because of the problem with interest compounding
  • The consumer should continue to try and make repayments (even if small) to show they are trying to pay (to assist with negotiation)

If the consumer cannot return to normal scheduled repayments within 6 months (longer if the loan is smaller) then consideration needs to be given to selling the home and asking for hardship on this basis.

Accessing Superannuation or Mortgage Assistance (if available)

Your client may wish to access their superannuation or apply for mortgage assistance. If the client is very likely to lose their home in the future, it is pointless accessing superannuation or mortgage assistance.

If the client’s financial hardship is likely to be resolved, it may be worth accessing superannuation or applying for mortgage assistance as long as this is in addition to an application for hardship. This means that you should try to negotiate a hardship arrangement that does not rely on access or approval being granted. This is to avoid the problems that occur when the amount is not sufficient making it necessary to renegotiate again.

Credit cards

Credit cards are a low priority debt. It is relatively easy to get repayment arrangements on credit cards. It is also often possible to negotiate:

  • interest to stop for 3 months or more
  • repayment moratoriums (where no repayments are made) for 3 months or more

Many credit providers are now reluctant to give moratoriums. If your client cannot afford any repayments you still need to negotiate a moratorium. A moratorium in these circumstances is reasonable as long as you can demonstrate how the consumer will be able to reasonably repay the loan in future (for example, when your client returns to work).

The other option is to negotiate for a nominal repayment amount while your client is in financial hardship. This amount needs to be affordable. If interest is being charged, a payment that covers interest will help to keep the debt from rising. Remember, if your client will not be able to afford to reasonably repay the debt then you may need to consider other options. Check whether your client may be able to get a waiver. See How to Guide: Requesting a debt release.

Personal Loans (unsecured)

Personal loans are usually to be repaid over a term of 3 to 7 years. The term of the loan is important because credit providers are usually reluctant to extend the term of the loan. This does not mean it cannot be extended but it may be arguably unreasonable to double the term of the loan (for example). In practice, the loan can be extended by a year or so but it can be difficult to extend it further than that. If the loan was quite small it can be easier to extend the term than if the loan is for a larger balance. You need to take this into account when negotiating a repayment arrangement.

It is also difficult to get moratoriums or a break from interest being charged with a personal loan. The credit provider will want the consumer to return to making the scheduled repayments as soon as possible. Again, it is a matter of showing that the proposed arrangement will repay the loan in a reasonable time.

Personal loans (secured) or car loans

This can be a high priority debt. A car may be essential for a consumer to get to work, get children to school, and/or get to medical appointments. For consumers who live in rural or remote areas the car can be essential for shopping. If the car is essential, repayments need to be a priority.

If a repayment arrangement has not been agreed and the default notice has expired unpaid then it may be necessary to lodge in EDR urgently to protect the car from repossession. As the car is at risk if a consumer defaults on a repayment arrangement, it is essential that repayment arrangements are affordable and the consumer understands that they need to prioritise this payment.

Sample letter: Financial hardship | credit law

Date

Credit provider

(Write to the IDR contact person for the credit provider available at www.fos.org.au or www.cio.org.au – use search for members)

Address

Dear,

RE: Client name
Type of loan:
Account number:

I am assisting (client name) in relation to the above loan account.

Please find attached an authority to release information, signed by my client.

My client gives notice of hardship under s. 72 of the National Credit Code (Schedule 1 of National Consumer Credit Protection Act 2009) (“NCC”)

I assume you will stay all enforcement action while you consider this application. If this is not possible, please let me/us know immediately in writing.

Reasonable cause

My client(s) have been in financial hardship because of illness and/or unemployment, and/or [examples of other reasonable causes are family breakdown, decreases in income, children’s illnesses, and/or caring responsibilities].

The details of my client’s illness/unemployment and/or other reasonable cause are as follows:

Give Details, eg, My client was unwell with a heart condition for six months ending in February 2009. A medical certificate is attached.

Expectation of being able to reasonably repay the loan if the variation is granted

My client(s) expect to be able to reasonably repay the loan if the requested variation below is granted.

Delete the options that are not applicable.

My client has been paying loan repayments of $    per fortnight/per month while s/he/they have been in hardship. OR

My client has now returned to work and can now afford the scheduled repayments on the loan. OR

My client(s) expect to return to work on [give date or number of months] and then my client will be able to afford the scheduled loan repayments.

The requested change to the contract

My client requests the following change to his/her/their contract:

Give details of the requested change

Please send a detailed Financial Statement of Position to be completed by my client, if required.

I assume that you will not continue to charge default fees, default interest or make an adverse listing on my client’s credit report while my client(s) hardship request is being considered.

As can be seen from the above information, my client will be able to discharge his/her/their obligations under the above contract if you agree to the proposed change. I/we ask that you consider this application as a matter of urgency.

I await your reply in writing within 21 days of the date of this letter.

Yours faithfully,

Sample letter: Financial hardship | no credit law

Date

Credit provider

(Write to the IDR contact person for the credit provider available at www.fos.org.au or www.cio.org.au – use search for members)

Address

Dear,

I am assisting (client name) in relation to the above loan account.

Please find attached an authority to release information, signed by my client.

My client wishes to apply to you for a variation of the above loan contract on the grounds of hardship.

Choose one of the options below if applicable:

Where the credit provider is a bank (check whether the bank is a subscriber to Code of Banking Practice at www.codecompliance.org.au):

I/we also refer to the commitment of the bank to:

s. 28 of the Code of Banking Practice

Where the credit provider is a credit union or building society (check whether the credit union or building society is a subscriber to Customer Owned Banking Code of Practice at www. customerownedbanking.asn.au)):

I/we also refer to the commitment of the credit union/building society to:

s. 24 of the Customer Owned Banking Code of Practice

Where the non–bank lender is a member of the Mortgage and Finance Association of Australia (check at www.mfaa.com.au):

I also refer to your commitments under s. 13 of the Mortgage and Finance Association of Australia Code of Practice.

I assume you will stay all enforcement action while you consider this application. If this is not possible, please let me/us know immediately in writing.

My client’s financial hardship

My client(s) have been in financial hardship because (give reason that is causing hardship – can be anything).

The requested change

My client requests the following change to his/her/their contract:

Give details of the change requested.

Please send a detailed Financial Statement of Position to be completed by my client, if required.

I assume that you will not continue to charge default fees, default interest or make an adverse listing on my client’s credit report while my client(s) hardship request is being considered.

I ask that you consider this application as a matter of urgency.

Yours faithfully,

EDR guide: Financial hardship

  • The contact details for both EDR schemes are:
  • Applying online to EDR is processed faster and confirmation can be received quickly
  • You can apply online for your client
  • There are application forms that can be printed available at www.fos.org.au or www.cio.org.au.
  • EDR stops all legal action while EDR is considering the dispute
  • If court proceedings have commenced, always lodge online and make sure you get confirmation of successful lodgement and that you state in the application that court proceedings have commenced.

This guide is for completing an application to EDR. There are a number of questions in the form but this guide concentrates on answering the problem description and the requested resolution.

Financial Hardship and EDR

Both EDR Schemes have the power to determine financial hardship under the Credit Law. They can also review compliance with a Code of Practice. The relevant rules are:

FOS – Terms of Reference

  • Clause 9.1(f): Remedies include a variation of the terms of a Credit Contract in case of financial hardship.
  • Clause 8.2: In deciding disputes, FOS must have regard to what is fair in all the circumstances having regard to, among other things, applicable industry codes or guidance as to practice.

CIO – Rules

  • Clause 9.6(i): Resolution of complaints may include the variation of the terms of a Credit Contract on grounds of financial hardship.
  • Clause 1.5: In resolving disputes, CIO will have regard to, among other things, applicable codes of practice.

Complaint Forms

The complaint forms for both EDRs are available online. You can also lodge online, which can be vital if the dispute is urgent. If you don’t have all the information and evidence you need, lodge with the best information you have at your disposal and forward the remainder as soon as possible.

Most of the form is self–explanatory. The following is a guide to the two questions requiring considerable detail.

Note: when completing the application form make sure you complete the following:
  1. If court proceedings have been received you should ensure you answer the question confirming this in the application. If court proceedings have been received it may be necessary to do the initial request for financial hardship in the application to EDR.
  2. If your client has discussed their payment difficulties with the credit provider then give a date for when the dispute was raised. If your client does not know the exact date then just estimate a date.

Dispute/Complaint Details

My client gave notice to (name of credit provider) about his/her financial hardship on (or about) / / . The request was made over the phone or in writing.

  • My client is in financial hardship because (give details)
  • My client will reasonably be able to repay the loan if the hardship arrangement requested is granted.

Delete the options that are not applicable:

  • My client received a reply from the (name of credit provider) on / / , rejecting the application, a copy of which is attached. OR
  • My client has not yet received a reply from (name of credit provider). OR
  • My client has been asked by (name of credit provider) to provide the following information (describe what has been requested). This is not possible/practical because (insert reasons why this request is unreasonable in the circumstances).

If your client has received a reply rejecting the application for hardship and giving reasons, address those reasons here. The most common reasons given will be that your client cannot reasonably repay the loan.

Fair and reasonable resolution of the dispute requested

My client requests the following resolution of his/her/their dispute (Delete the options that are not applicable):

  • A reduction of the amount of each repayment to $    per week/fortnight/month or a moratorium. This change is requested for (number of months) months. The term of the loan to be extended and any arrears added to the loan (capitalised).
  • A reduction of the amount of each repayment to $    per week/fortnight/month or a moratorium. This change is requested for (number of months) months. The arrears will be added to the loan and the scheduled loan repayments increased so the term of the loan remains the same.
  • for credit cards - the minimum repayment is reduced to $    for (number of months) months or permanently with no interest to be charged.
  • for home loans if the home is being sold - a reduction in the amount of each repayment or a moratorium for 6 months with contracts for the sale of the home to be exchanged within 6 months.
  • if there is a statement of claim/summons - the statement of claim/summons discontinued
  • no default listing. If a default listing has been made it must be removed

Remember: the above list is a guide of what to request. Depending on the circumstances, some of the requests listed above will be subject to negotiation.

If a detailed income and expenditure statement required by the credit provider has been completed, attach a copy, along with any proof of income or unusually high expenditure.