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Credit law toolkit

Enforcement (Part 5 NCC)

Main Points

  • The Credit Law prescribes the process that must be followed before a debt can be enforced.
  • Default notices are covered by section 88 of the National Credit Code and require additional information, most significantly:
    • Information about the consumer’s right to apply for hardship
    • Information about EDR.
  • Consumers can go to EDR even after legal proceedings have commenced, but not usually after judgment.

Enforcement and the Credit Law

The Credit Law provides certain rights to consumers in the event of enforcement action. Enforcement action is when the credit provider starts to pursue payment of the debt in full (including taking action in a court) and/or take possession of any security for the loan.

A consumer’s loan contract will provide that if the consumer defaults on a condition of their loan then the credit provider can take action on that default.

There are many possible ways to default on a loan but the most common one is a failure to make the repayments required under the contract. Some other ways to default are:

  • Failure to insure the security (eg, home or car)
  • Going bankrupt or committing an Act of Bankruptcy
  • Failure to keep the security for the loan in reasonable condition
  • Selling or disposing of mortgaged property (such as a car) or significantly modifying mortgaged property (such as extensive renovations) without permission

What is the enforcement process?

General Enforcement Process (applies to all regulated contracts)

Default

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Notice under Section 88 of the Credit Law

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30 days to pay the amount of the default and the usual repayment

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If the default and usual repayment are paid then the contract goes back to normal

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If not, the credit provider can make the whole loan repayable

AND

Commence court proceedings to recover the whole debt

AND

Repossess security property (if the loan is secured)

More detail about the process for repossessing goods and vehicles that are security for the loan is contained in Repossession of goods (including vehicles). There is more information about enforcement process for leases in Linked credit and for home mortgages in Guarantors and co-borrowers.

The default notice

The default notice requirement in the Credit Law is a key consumer right. In contracts not regulated by the Credit Law, it is possible for the credit provider to make the debt immediately owing on default.

In the Credit Law, it is a requirement (s. 88 NCC) that before enforcement proceedings can be commenced:

  • The consumer must be in default
  • The credit provider has given the consumer at least 30 days written notice to fix the default (See Form 12A)
  • Those 30 days have expired and the consumer has not fixed the default

The default notice must contain:

  • A prominent heading stating that it is a default notice. It does not have to mention s. 88 of the Credit Law.
  • What needs to be done to fix the default.
  • The date when enforcement proceedings may begin in relation to the default and possession of the mortgaged property (the security for the loan) if the default is not fixed.
  • That the repossession and sale of the mortgaged property may not extinguish the consumer’s liability. That is, there may be a shortfall and the consumer will be liable for that shortfall.
  • Information about the consumer’s right to–
    • Apply for financial hardship under s. 72.
    • Negotiate a postponement of enforcement under s. 947
    • Make an application to the court under ss. 74 and 96 to enforce an application for hardship or postponement of enforcement.
  • The right to apply to EDR.
  • If a further default occurs during the period of the default notice period that no further notice is required. A common mistake consumers make is to pay the arrears in the default notice but forget to make the usual repayment!
  • That the debt may be listed on a consumer’s credit report if the debt remains overdue for more than 60 days and the credit provider has taken steps to recover all or part of the debt (section 6Q of the Privacy Act)
  • That the whole debt is payable if the default is not fixed. This is called an acceleration clause (ss. 92 & 93 NCC).

There is a prescribed form to be used for a default notice (Form 12A).

If the default is remedied as described in the default notice then the contract is reinstated. This is an important right for consumers.

Some practical tips for default notices:

  • Work out when this notice is due to expire, tell your client and mark it in your diary.
  • If possible, get a repayment arrangement in place BEFORE the default notice expires. Make sure you have a record that the client has applied to the credit provider for a hardship variation (s. 72 NCC) within the default notice period. The safest way to do this is to correspond in writing (you can use faxes or email in urgent situations), or follow up any verbal conversations with written confirmation of what you have requested on behalf of the client and to what, if anything, they have agreed.
  • If the default notice is due to expire soon, or has expired (without being fixed), then make sure you or your client rings the credit provider and gets its confirmation that it will not proceed with further legal action while the dispute is being investigated or a request for financial hardship is being considered. If the default notice has expired without being fixed:
    • Check with the client if legal proceedings have been commenced and, if so, when
    • If the client is not sure whether legal proceedings have been commenced, contact the credit provider
    • Apply for a hardship variation and an undertaking from the credit provider to stay enforcement action, if you have not already done so
    • Keep trying to negotiate
    • Lodge in EDR if legal action is being threatened or has commenced

7 Section 94 gives the consumer the right to apply for a postponement of enforcement provided the application is made within the period of the default notice. This will rarely be necessary as lodging in EDR effectively provides a postponement of enforcement in any case. In any event the consumer can apply for a stay of enforcement under s. 74 if they are applying for a hardship variation.

What about court?

Court is commonly used by credit providers to enforce their debts.

For the consumer, it is best avoided due to the cost and intimidating procedures. For consumers, EDR is the place to be if a dispute cannot be resolved or for financial hardship.

If the consumer is in Court and EDR is not an option, the consumer needs to get legal advice. For more information on when this might happen, see Licensing and External Dispute Resolution.

Can a credit provider commence enforcement proceedings without a default notice?

Although this happens rarely, there are certain situations when a credit provider can commence enforcement proceedings without issuing a default notice (or within the 30–day period of the default notice):

  • The credit provider believes on reasonable grounds that it was induced by fraud on the part of the consumer to enter into the loan
  • The credit provider is unable to locate the consumer
  • The court authorises the credit provider to begin enforcement proceedings
  • The credit provider believes on reasonable grounds that the consumer has disposed of or intends to dispose of the mortgaged property without permission

Financial hardship and enforcement

If the consumer has requested a change on the grounds of financial hardship (s. 72 NCC) then the credit provider cannot proceed with enforcement proceedings until the credit provider has responded to the hardship notice (s.72(4)(b)) and 14 days has elapsed from the date that notice was given. This requirement will not apply if a hardship notice was given to the credit provider in the 4 months preceding the current hardship notice.

Credit Reporting and defaults

For a default to be listed on your client’s credit report the credit provider must:

  1. Send a section 6Q (of the Privacy Act) notice which must tell your client the payments is overdue. This notice is usually included in the default notice under section 88 of the National Credit Code
  2. Your client must be 60 days in default
  3. Your client must also be sent a section 21D(3) (of the Privacy Act) informing your client that a default will be listed. The listing cannot be made until 14 days after the notice or more than 3 months after the notice.

Unreasonable enforcement expenses

Section 107 of the NCC states that a credit provider cannot recover enforcement expenses from a consumer in excess of those reasonably incurred by the credit provider.

If you believe the enforcement costs are unreasonable:

  • Ask for full details of all enforcement expenses charged including detailed legal invoices
  • Raise a dispute about the enforcement expenses with the credit provider
  • Lodge a dispute in EDR