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Credit law toolkit

Financial hardship (section 72-75 NCC)

Main Points

  • A debtor who is unable to meet their repayments under a credit contract or lease can give the credit provider notice (a hardship notice). The notice can be made verbally or in writing.
  • Within 21 days of the hardship notice the credit provider can ask the debtor for relevant information. The debtor must provide the relevant information within 21 days of the request.
  • Credit providers must respond to the hardship notice within a set time frame including, if they say no, their reasons for refusal and details of the EDR scheme the consumer can complain to.
  • The credit provider cannot commence enforcement proceedings until 14 days after a notice of refusal following a hardship notice (this requirement does not apply if a hardship notice had been made in the preceding 4 months).
  • EDR schemes can make repayment arrangements on the grounds of financial hardship (vary the credit contract) under the Credit Law.
  • Consumers can go to EDR even after legal proceedings have commenced, but not after judgment.
  • Consumers may have rights under a Code of Practice in addition to the Credit Law or if the Credit Law does not apply to their loan. EDR can also accept these disputes although the powers of the EDR scheme may be more limited if the loan is not covered by the Credit Law.
  • See Home repossession for financial hardship and home loans.

What is financial hardship?

Financial hardship is difficulty in paying loans and debts when repayment is due.

Many consumers only seek out financial counsellors, community workers, and credit lawyers because they are in financial hardship. There may be other issues to consider but the central problem is often that the consumer is having trouble making their loan repayments.

There are often two main reasons for financial hardship:

  1. The consumer could afford the loan when it was obtained but a change of circumstances has occurred after getting the loan or
  2. The consumer could not afford to repay the loan when it was originally obtained.

If the consumer is in the second category, you need to consider a dispute based on irresponsible lending conduct and/or unjustness. See Responsible lending conduct and Unjustness.

Consumers have certain rights under the Credit Law to access repayment arrangements because they are in financial hardship. Knowing about and using these rights is one of the most important tools available to caseworkers to assist consumers.

Remember: Financial Hardship is not limited to hardship rights under the Credit Law. Many credit providers are prepared to negotiate a wide range of repayment arrangements regardless of whether the Credit Law applies or not. Some credit providers are required to reasonably negotiate financial hardship under a relevant Code of Practice.

The difference is that the consumer’s request for financial hardship under the Credit Law can be enforced in court or determined in EDR if the credit provider refuses the request and the request complies with the criteria set out in the law. EDR can also determine whether there has been a breach of a relevant Code of Practice.

How does the Credit Law help?

The Credit Law has sections (s. 72-75 NCC) that specifically deal with financial hardship.

The Credit Law assists consumers in financial hardship by:

  • Giving consumers the right to apply for financial hardship (subject to certain requirements).
  • Requiring the credit provider to respond to the application in writing within 21 days (after any information requested is supplied) stating:
    • Whether the credit provider agrees to the change and
    • If the credit provider does not agree to the change notify the consumer of:
      • the contact details of the relevant EDR
      • the consumer’s right to go to EDR and
      • the credit provider’s reasons for refusing the hardship application.
  • All enforcement is stopped until 14 days after the credit provider’s refusal of the request for a change on the grounds of hardship
  • If the credit provider agrees to the repayment arrangement it must give the consumer a notice in writing within 30 days after the agreement is made stating the particulars of the change.
  • If the credit provider does not agree to the application for change then the consumer can apply to EDR for the requested change.
  • If the consumer is unsuccessful in EDR then the request for hardship can be enforced in Court.

These are all important rights for the consumer.

Hardship Options Summary

Contract details EDR Court
Contract is regulated by the Credit Law (and possibly a Code of Practice) and the loan is below the relevant hardship threshold prescribed by law. Credit Provider is a member of EDR. Can apply to EDR. EDR has the power to vary the contract in a variety of ways if an agreement cannot be negotiated provided the value of the variation sought is less than the maximum compensation amount for the EDR scheme. As it is calculated on the value of the variation almost every hardship case will be below the compensation cap.

Can apply to Court. The Court can vary the contract if agreements cannot be negotiated. To succeed in Court the application must address all the elements of s. 72 and be confined to one of the variation options given in s. 72. The loan must be less than the relevant hardship threshold.

Note: The threshold is determined by when the loan was entered and not the amount at the time of the application.

Contract is regulated by the Credit Law and the loan is below the relevant hardship threshold prescribed by law. Credit Provider is not in EDR.* EDR is not available. Can apply to Court. The Court can vary the contract if agreements cannot be negotiated. To succeed in Court the application must address all the elements of s. 72 and be confined to one of the variation options given in s. 72.
Contract is regulated by the Credit Law (and possibly a Code of Practice) but above the hardship threshold. Credit Provider is a member of EDR. Can apply to EDR. EDR has the power to vary the contract in a variety of ways if an agreement cannot be negotiated provided the value of the variation sought is less than the maximum compensation amount for the EDR scheme. As it is calculated on the value of the variation almost every hardship case will be below the compensation cap. Court is not available.
Contract is not regulated by the Credit Law, but the Credit Provider is a member of an EDR and/or a signatory to a relevant Code of Practice. Can apply to EDR. EDR can negotiate, determine whether any relevant provision of a Code of Practice has been breached and an appropriate remedy, but it cannot ultimately vary the contract on grounds of hardship if the lender refuses to do so. Court is not available.
Contract is not regulated and the Credit Provider is neither a signatory to a Code of Practice, nor a member of EDR. This is most likely to be the case for (real and ostensible) business or investment debts (excluding residential property).**

No EDR available.

Negotiation is the only option.

Court is not available.

Negotiation is the only option.

Note
* Lenders who are still managing/collecting loans, but have not entered any new loans, or increased the limited on any loans, from 1 July 2010, do not have to be licensed or members of EDR.
** This may also occur where the lender is no longer lending (see previous note), and the loan is regulated but above the hardship threshold.

How to apply for a hardship variation under the Credit Law

Section 72 of the Credit Law covers the circumstances where a consumer can request a repayment arrangement on the grounds of financial hardship.

There are six parts of an application for financial hardship:

  1. The consumer must be having (or will have) difficulty meeting their obligations under the loan (s.72(1) NCC)
  2. The consumer must contact the credit provider and give them notice (the hardship notice). This notice can be given in writing or orally (s.72(1) NCC)
  3. If the credit provider requests further relevant information the consumer must provide that information within 21 days of the request (s.72(2) NCC)    
    • Does not believe there is a reasonable cause for the hardship (eg. illness or unemployment)
    • Reasonably believes that the consumer would not be able to reasonably repay the loan even if it was changed.
  4. The credit provider does not need to agree to the requested change, especially if the credit provider:    
    • If the request is agreed then the details of agreement are confirmed in writing
    • If the request is refused the consumer will be notified in writing of:
      • That the requested change is not agreed
      • The reasons for not agreeing
      • The name and contact details of the EDR scheme that the credit provider is a member
      • The consumer’s rights in that EDR scheme
  5. The consumer will receive a decision from the credit provider in writing (except for arrangements less than 90 days in duration) on the request for a change on the grounds of hardship within a certain time frame (see Negotiation for details)
  6. A threshold applies to go to Court (depending on the date the loan was given)

So what does all this mean?

Note

Financial hardship is available for loans and consumer leases. Generally the guidance below applies to consumer leases but see Consumer leases for specific guidance.

Part 1: Trouble meeting an obligation

The most common obligation a debtor cannot meet is their loan repayments. This will be the focus of this chapter. However, there are other obligations that may be relevant, for example, negotiating time to pay a home building insurance policy. If you have a client who is in default of another obligation other than repayments seek legal advice.

Significantly, this section makes it clear that a financial hardship variation can be requested when the consumer knows they will in future have trouble making their loan repayments.

Part 2: Contact the credit provider

The hardship notice can be given orally or in writing. The most common way a consumer will request hardship will be over the phone, often in response to a debt collection call. It is worth noting that the consumer only has to give notice of their inability to make the repayments. The consumer does not have to mention particular words like “hardship”.

Tip

The Credit Law no longer states the types of hardship variations that can be agreed. This means there is now a lot of flexibility in the agreements that can be made. It also means that a hardship variation can be requested where no interest is charged for a period of time. Getting interest stopped for a period of time may be available for some hardship requests usually for smaller debts.. This is new, and at this stage it is unlikely to be a remedy you can seek in EDR or Court.

Part 3: The credit provider can request further relevant information.

The credit provider does not have to request further information. If only a short term arrangement is required the credit provider may request very little information and simply agree to an arrangement. If the requested arrangement is more complicated the credit provider will often request a statement of financial position to be completed and relevant documents to be provided.

The information requested by the credit provider must be relevant to deciding:

  • Whether the consumer is having trouble making the repayments
  • How to change the contract

In practice, this will mean the credit provider may request any of the following:

  • Statement of financial position
  • Income (and evidence of this)
  • Major expenses (e.g. loans and evidence of this)

It is recommended that any relevant information/documents requested by the credit provider are provided by your client.

Part 4: Credit provider is under no obligation to agree to the requested change

It can just say “no” and give reasons. However, that decision is subject to review if the consumer lodges in EDR (or more rarely Court). If that decision is unreasonable then it can be overturned and the variation made by EDR ( or court).

The credit provider can say no to the change and, in particular, can say no for either of the following main reasons:

  • There is no reasonable cause for the hardship; and/or
  • Even if the proposed change was made the consumer could still not reasonably repay the loan
Reasonable cause

There must be a reasonable cause for the financial hardship. A reasonable cause must impact on the consumer’s income in some way. Examples of reasonable causes are:

  • Illness (which includes mental illness)
  • Unemployment
  • Family breakdown
  • Business failure
  • Caring for an ill relative
  • Funeral expenses

There are very few court decisions on this part of the law but it is recommended that these words be interpreted widely. As the law does not provide a limitation to what may be a reasonable cause, there may be other acceptable reasons that are not listed here.

Reasonably repay the loan

This the most common reason for refusal of a hardship notice by credit providers. It is essential that a plan is set out on how the loan will be repaid.

As a guide, here are some examples where it could be argued the consumer would reasonably expect to repay the loan:

  • The consumer has a loan of $20,000 and loses their job. It takes 6 months to get another job. An arrangement is made to pay minimal repayments while unemployed and the loan term is extended by 6 months.
  • The consumer has a loan of $20,000 and loses their job. It may take 6 months to get another job. The 6 months to get a job is an estimate. An arrangement is made to pay minimal repayments while unemployed and the loan term is extended by 6 months.
  • The consumer is ill for 6 months and has a home loan of $350,000. The consumer’s partner continues to work and repay part of the mortgage. An arrangement for 50% of the normal repayments to be made for 6 months with the loan term extended.
  • A consumer has $15,000 left to repay on their home mortgage when they become permanently disabled in an accident. A repayment arrangement could be made for a lesser amount to be paid until the loan is repaid in full.
  • A consumer is made redundant from their job when they are 58 years old. They are unable to find further work. They have a $4000 credit card. A permanent repayment arrangement could be negotiated until the credit card debt is paid in full with the card cancelled.
  • The consumer has a serious illness and will not be able to work for the foreseeable future. He has a home mortgage of $300,000. He decides to sell his home and seek a reduced repayment arrangement for 6 months until his home is sold which will repay the loan in full.

As a guide, here are some examples where it would be very difficult to argue the consumer would reasonably expect to repay the loan:

  • The consumer is suffering from a chronic mental illness that emerged after the loan was obtained. She has a personal loan of $30,000. The amount she can afford from her Centrelink payments does not cover the interest. She cannot return to work for at least another year, if at all.
  • The consumer has a loan of $500,000. He has been injured at work and receiving workers compensation payments. Due to the injury, it is expected he will not be able to work for some years. The workers compensation payments only allow him to pay part of the interest repayments. He refuses to sell his home.

Tip

FOS Approach to Financial Difficulty (available at www.fos.org.au) specifically discusses the situation of a hardship notice by one of two or more co-borrowers.

Remember: The borrower requesting hardship needs to make an arrangement that demonstrates they (alone) can reasonably repay the debt.

Part 5: Credit provider must respond to the hardship notice

The following time frames:

If:When the reply must be sent by:
The credit provider does not require further information21 days after receiving the hardship notice
The credit provider requests information and the consumer does not provide that information28 days after the date of the notice given by the credit provider requesting further information
The credit provider requests information and the consumer provides the information21 days after the date of receiving the information.

The credit provider is only required to respond in writing if the requested hardship variation is for more than 3 months.

Tip

Encourage your clients to keep notes of their request for hardship and the response. Note the date, time, name of the person they spoke to and details of the response.

If it is likely the financial hardship request may need to be enforced in Court, the application must be one (or more) of the options listed above. See What if the credit provider is not in EDR?

Part 6: Hardship threshold

The threshold under the Credit Law is not relevant to making an application to EDR. EDR schemes have thresholds based on the amount of compensation sought. The EDR schemes take the view that the compensation is the amount of the variation sought. Therefore, if the consumer were seeking a temporary reduction in repayments for 3 months, the amount in dispute would be those 3 months of repayments.

This means that almost all hardship claims will be well below the threshold for EDR!

For enforcement in court:

  • For contracts entered into, or refinanced, from 1 July 2010, the relevant threshold is $500,000 (being calculated on the original loan amount approved).
  • For contracts entered into prior to 1 July 2010, the floating threshold applicable under the Code will still apply.

What does a workable arrangement look like?

The aim is to make a repayment arrangement that is affordable and sustainable. It is essential to propose a repayment arrangement that will work.

story icon, an open bookAngela’s story

Angela was behind on her personal loan repayments because she had lost her job. BIG BANK rang after she missed her second repayment. Angela was told by BIG BANK that it had already sent her a letter telling her to pay. Angela tried to explain that she was unemployed and had applied for Centrelink support but currently had no income until she got her first payment. BIG BANK asked Angela what she could afford to pay. Angela had no income and again repeated that she did not know until she got her first payment from Centrelink. BIG BANK insisted that she had to agree to a repayment arrangement. Under pressure Angela agreed to $100 a month.

The arrangement agreed in the story above is unworkable because Angela had no way to pay the 1st repayment of $100. Angela also does not know whether the payment of $100 a month is affordable when she starts getting Centrelink payments.

What is an unworkable arrangement?

Examples of an unworkable arrangement are:

  • Where the repayments are not affordable
  • Lump sum repayments where the consumer does not have that money available or cannot definitely get that money within the time available
  • A reduced repayment arrangement of a certain amount per month but no agreement as to whether the arrears are capitalised at the end of the term of the reduced repayment arrangement
  • Increased repayments at the end of a term of reduced repayments that are not affordable

A workable repayment arrangement will be:

  • Flexible – if circumstances change the arrangement can change.
  • Realistic – getting a job in 2 weeks may not be realistic
  • Affordable – the repayments must be affordable
  • Cover the whole arrangement – it must cover both the reduced repayment arrangement and what happens at the end of the arrangement
  • The credit report – will there be a listing?
  • Default fees and default interest – should stop being charged

An example:

  • Repayments will be reduced to $500 per month for 6 months
  • At the end of the 6 months, repayments go back to the normal scheduled repayments of $1,000 per month
  • All arrears will be capitalised (added to the loan) and the loan term extended
  • No credit report listing
  • No default fees and/or default interest to be charged once the repayment arrangement commences provided the borrower complies with the arrangement

How to ask for a financial hardship arrangement (hardship notice)

Most financial hardship arrangements are made over the phone with the credit provider. The consumer may be contacted by the collections department or the consumer may contact the credit provider to tell them they cannot afford their repayments.

It can be very difficult to request a hardship arrangement when a consumer has to deal with an aggressive person from the credit provider’s collections department.

Most often, the consumer will come to see you after unsatisfactory contact with the credit provider.

Some suggestions for your client when contacting the credit provider are:

  • State you are in financial hardship
  • State why you are in financial hardship
  • Have a proposal to make
  • Always make a note of the details of the phone conversation including the name of who you talked to, what happened, the date and the time
  • Ask to be referred to the financial hardship team (if there is one)
  • Don’t agree to arrangements you cannot afford— If the arrangement being offered won’t work for you then consider writing to the credit provider and getting advice

If you are a caseworker then it is strongly suggested you request a financial hardship arrangement in writing. This is not required by the law but it will enable you to:

  • Have a record of the application
  • Write to the IDR contact (or specific hardship contact if one is listed) for the relevant EDR Scheme—This can be found by going to either www.fos.org.au or www.cio.org.au and searching for the member contact details
  • Gather any required information, eg, evidence of reduced income
  • Mention the relevant sections of the Credit Law (s. 72 NCC) and any applicable Code of Practice (See Relevant financial hardship provisions for the relevant Code of Practice provisions)
  • Give some thought to the requested arrangement and tailor the request to your client’s instructions
  • Get advice, if required
  • Request that the credit provider not take legal action
  • Give a written authority from your client to the credit provider

Tip

If you are a financial counsellor, you will have usually assessed your client’s capacity to pay before you offer a repayment arrangement. If you are a lawyer, it is strongly recommended you consider referring your client to a financial counsellor to conduct such an assessment before you offer an ongoing repayment arrangement. Some consumers can be very unrealistic in their assessment of their own ability to meet a certain level of repayments. You can always make an interim arrangement with the credit provider while your client is being assessed.

Negotiation

This section deals with the art of negotiation in making a financial hardship arrangement.

  1. Always make sure the client understands that they should be making regular repayments of an amount they can afford. This is so it is clear to the credit provider that the consumer is acting in good faith in requesting the repayment arrangement and has the capacity to stick to it. It also reduces the debt.
  2. This is so it is clear to the credit provider that the consumer is acting in good faith in requesting the repayment arrangement and can demonstrate ability to pay. It may also reduce the debt.
  3. Make the request in writing and follow the request up with a phone call to confirm the credit provider has received the letter AND has stopped all collection action.
  4. Gather and provide relevant information to the credit provider.
  5. Be persistent. Ring and write to try to persuade them to make an arrangement. Remember, the consumer is usually being charged default fees and interest until a repayment arrangement is made. You can ask for these default fees to be stopped whilst hardship assistance is provided.
  6. The credit provider must respond within 21 days of the request. Mark your diary for when to expect this response.
  7. If legal action is threatened, then lodge in EDR to stop legal action until the request for the variation can be determined. You should still be continuing to try to get an arrangement directly with the credit provider.

What do you do if the credit provider agrees?

This will usually be the outcome for the first request. Credit providers will often readily agree to arrangements of less than 3 months.

Make sure:

  • The arrangement is in writing (if not by the credit provider then by you or the consumer)
  • Your client understands what they need to do
  • Your client understands to get advice immediately if they cannot keep to the arrangement

You need to check:

  • Are the proposed repayments affordable?
  • Is the term sufficient for the predicted period of hardship?
  • Does the arrangement need to include a review (e.g. for unemployment)?
  • Does the consumer have to return to making higher repayments (than the scheduled repayments) at the end of the arrangement? If so is this affordable given the recent period of financial hardship?
  • Does the agreement mention what happens with the arrears? It is usually more workable for the borrower to capitalize the arrears and extend the term of the loan so repayments are not increased.

If the arrangement is not suitable, the borrower needs to go back to credit provider and review the arrangement.

What if the credit provider says no or does not respond?

If the credit provider rejects your request for financial hardship it must give reasons (s. 72(4) (b) (ii) NCC).

There is no requirement in the Credit Law for the credit provider to act in good faith in considering a request for financial hardship. It is likely that the reasons given by the credit provider will not be detailed. If the request for the repayment arrangement is rejected it is worth ringing the credit provider to discuss this and see if the request could be changed so it could be accepted to address the credit provider’s concerns.

The credit provider might reject a reasonable repayment arrangement. Be prepared to escalate a complaint if the proposal is reasonable, yet rejected. If the credit provider gives a reason that is not relevant under the Credit Law, this should be pointed out in your response, or subsequent EDR complaint. Examples of irrelevant considerations include:

  • The length of time the borrower has been in the loan
  • The borrower’s repayment history (except in so far as it is relevant to their ability to reasonably repay the loan)
  • The decision of the relevant credit provider’s mortgage insurer
  • The fact that a request for hardship assistance has been made and/or accepted before and
  • Whether the borrower can make a particular (usually lump sum) payment towards arrears as a precondition to the credit provider considering their request for a hardship variation

If further negotiation does not work, the next step is to lodge in EDR. Include both the consumer’s application and the credit provider’s response in the complaint.

If you do not get a response, you should consider complaining to ASIC as well as EDR. See How to Guides: Financial hardship and EDR Guides: Financial hardship.

See also Unreasonable Enforcement Expenses in Unjustness.

Financial hardship and 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 where the Credit Law applies then it is far preferable to go to EDR than court. Remember that for the hardship claims the amount in dispute will usually be much, much lower than the value of the contract.

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 or repossession
  • The credit provider has issued a Summons or Statement of Claim

If the credit provider has issued legal proceedings, you must lodge in EDR before the credit provider obtains judgment. After judgment, EDR cannot consider the dispute. There is a limited power for the Credit and Investments Ombudsman to review a matter after judgment has been given, but it is safer to lodge in EDR beforehand. (See External dispute resolution for more detail in relation to CIO’s post judgment jurisdiction.)

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

See How to Guides and sample letters for how to make an application in EDR.

If the consumer is unsuccessful in EDR, they still have the option of going to court (s. 74 NCC) and should seek legal advice on how to do this.

Tip

When a hardship application has been rejected by the credit provider, or no response made , you can lodge immediately in EDR. Where legal proceedings have commenced, you can also go to EDR immediately. Lodge a complaint urgently (online if possible) and follow up to ensure your client’s dispute has been accepted into the EDR’s system. If the consumer has not formally requested a hardship variation, do so at the same time as lodging in EDR, particularly if the time for lodging a defence has, or is about to, expire.

What if the credit provider is not in EDR?

Credit providers who are still managing/collecting loans, but have not entered any new loans, or increased the limit on any loans, after 30 June 2010, do not have to be licensed or members of EDR (they can choose to be members). These lenders are subject to different rules, including more onerous reporting to ASIC in relation to breaches of the law and hardship applications. If a consumer is having difficulty getting a hardship variation from a credit provider in this category, they can seek legal advice about applying to the court for a hardship variation. This is only possible if all the criteria under s. 72 of the NCC are met, including that the loan is below the relevant threshold and that the variation sought meets the requirements set out in s. 72.

Always check if the lender is a member of EDR before considering other options.

What if the Credit Law does not apply to the loan?

There are still other options available.

Three Codes of Practice deal with financial hardship. The Codes of Practice do not limit financial hardship to loans regulated by the Credit Law. Therefore, if the credit provider subscribes to a relevant Code of Practice they may need to consider financial hardship requests in relation to investment  loans4 and small business loans in addition to regulated credit. EDR can also consider disputes about whether a member has complied with their obligations under a relevant Code of Practice. This can be particularly useful if the credit provider has  blatantly failed to comply with a relevant Code of Practice, but it can also help if negotiations have simply stalled. EDR will not, however, make a final decision about any particular repayment arrangement unless the credit law regulates the credit contract.

The relevant Codes of Practice are:

Copies of the relevant provisions of each Code of Practice are included in Relevant financial hardship provisions.

4 Other than loans for investment in residential property, which are covered by the Credit Law and the Codes of Practice.