Hardship IssuesHardship Issues

Kay BoeyKay Boey

Consumer Credit Legal Service (WA) Consumer Credit Legal Service (WA) IncInc

September 2011September 2011 This presentation is for information only. You This presentation is for information only. You

must seek legal advice in relation to any must seek legal advice in relation to any particular circumstances.particular circumstances.

Hardship VariationsHardship VariationsHardship variation provisions of the NCC Hardship variation provisions of the NCC

are contained in are contained in sections 72-74sections 72-74..

A debtor who is unable reasonably, A debtor who is unable reasonably, because of illness, unemployment or because of illness, unemployment or other reasonable cause, to meet the other reasonable cause, to meet the debtor’s obligations under a credit debtor’s obligations under a credit contact and who reasonably expects to contact and who reasonably expects to be able to discharge the debtor’s be able to discharge the debtor’s obligations if the terms of the contract obligations if the terms of the contract were changed may apply to the creditor were changed may apply to the creditor for such a change.for such a change.

So what does that mean?So what does that mean?

Under the NCC a debtor can apply Under the NCC a debtor can apply for a hardship variation on the for a hardship variation on the grounds of unemployment, illness or grounds of unemployment, illness or other reasonable cause; ANDother reasonable cause; AND

if they reasonably expect to be able if they reasonably expect to be able to discharge their obligations under to discharge their obligations under the contract if the contract were the contract if the contract were changed.changed.

Obligation at law to Obligation at law to considerconsider

A creditor is A creditor is onlyonly obligated by lawobligated by law to to consider a variation if:consider a variation if:

From 1 July 2010 – amount borrowed is From 1 July 2010 – amount borrowed is less than less than $500,000$500,000

Before 1 July 2010 –Before 1 July 2010 – amount borrowed amount borrowed is less than is less than floating threshold floating threshold

Perpetual Trustees Victoria Ltd v MonasPerpetual Trustees Victoria Ltd v Monas [2010] NSWSC 1156 – threshold in force at [2010] NSWSC 1156 – threshold in force at time contract was entered intotime contract was entered into

Example of the hardship Example of the hardship thresholdthreshold

DateDate Hardship Hardship threshold threshold $$

9 September 2008 – 8 October 9 September 2008 – 8 October 2008 2008

$332,750 $332,750

9 August 2008 – 8 September 9 August 2008 – 8 September 20082008

$368,390 $368,390

10 June 2009 - 7 July 2009 10 June 2009 - 7 July 2009 $340,780 $340,780 •http://www.moneysmart.gov.au/managing-my-money/managing-debts/trouble-with-debt/hardship-threshold#12jan2011

Reasonable CauseReasonable Cause a short period in jail (a short period in jail (McNally v ANZ (2001) ASC McNally v ANZ (2001) ASC

155-047155-047); ); leaving employment for valid personal leaving employment for valid personal

circumstances (circumstances (Ward-Miller v Perpetual Trustees Ward-Miller v Perpetual Trustees (2001) ASC 115-046(2001) ASC 115-046); );

financial commitments toward other family financial commitments toward other family members and the family home (members and the family home (Garner v Capital Garner v Capital Finance Australia [2003] VCAT 1171Finance Australia [2003] VCAT 1171); and ); and

a general deterioration in the debtor’s financial a general deterioration in the debtor’s financial circumstances (circumstances (Jones v ANZ [2004] NSWCTTT Jones v ANZ [2004] NSWCTTT 381381). ).

ChangesChanges

Section 72(2): A debtor can apply to:Section 72(2): A debtor can apply to: reduce repayments and extend reduce repayments and extend

the term the term postpone repayment (with no postpone repayment (with no

extension)extension) postpone repayments and extend postpone repayments and extend

the termthe term

A few things to A few things to remember…remember…

A creditor is not obligated by law to A creditor is not obligated by law to grantgrant a hardship variation. a hardship variation.

Creditor must respond to the Creditor must respond to the application within 21 days – s 73 of application within 21 days – s 73 of NCCNCC

The response must state whether or The response must state whether or not they agree to the change.not they agree to the change.

There isThere is no positive obligation at law no positive obligation at law to offer a hardship variation before to offer a hardship variation before commencing enforcement commencing enforcement proceedings, however some industry proceedings, however some industry Codes of Conduct require members Codes of Conduct require members to suggest hardship applications to suggest hardship applications (s25.2 Code of Banking Practice, s24 (s25.2 Code of Banking Practice, s24 Mutual Banking Code of Practice).Mutual Banking Code of Practice).

Section 25.2 of Code of Section 25.2 of Code of Banking PracticeBanking Practice

With With youryour agreement, agreement, wewe will try to help will try to help youyou overcome overcome youryour financial difficulties financial difficulties with any credit facility with any credit facility youyou have with have with usus. . WeWe could, for example, work with could, for example, work with youyou to to develop a repayment plan. If, at the time, develop a repayment plan. If, at the time, the hardship variation provisions of the the hardship variation provisions of the Uniform Consumer Credit Code (now NCC) Uniform Consumer Credit Code (now NCC) could apply to could apply to youryour circumstances, circumstances, wewe will will inform inform youyou about them. about them.

A few things to A few things to consider…consider…

A creditor may be reluctant to grant A creditor may be reluctant to grant a hardship variation if:a hardship variation if: the hardship variation is simply going to the hardship variation is simply going to

delay enforcement; anddelay enforcement; and there is no real prospect of meeting there is no real prospect of meeting

contractual obligations under the varied contractual obligations under the varied contract.contract.

Even if the creditor is not obligated Even if the creditor is not obligated to consider a hardship variation to consider a hardship variation under the NCC, a debtor could try under the NCC, a debtor could try applying for a hardship variation applying for a hardship variation anyway.anyway.

Refusal to grant a hardship Refusal to grant a hardship variationvariation

If the creditor refuses an application If the creditor refuses an application for a hardship variation (or fails to for a hardship variation (or fails to respond), the borrower can complain respond), the borrower can complain to the lender’s EDR scheme. Both to the lender’s EDR scheme. Both schemes now have the power to schemes now have the power to determine the substance of a determine the substance of a hardship variation hardship variation under the NCC under the NCC (substitute the decision of the EDR (substitute the decision of the EDR scheme for the lender’s decision)scheme for the lender’s decision)

Financial Ombudsman Financial Ombudsman Service (FOS)Service (FOS)

Phone number: 1300 780 808Phone number: 1300 780 808 Website address: www.fos.org.auWebsite address: www.fos.org.au FOS have power to vary the terms of a FOS have power to vary the terms of a

credit contract in cases of financial credit contract in cases of financial hardshiphardship

Debt collection activity must be put on hold Debt collection activity must be put on hold and legal proceedings must not be and legal proceedings must not be instigated once a dispute has been lodgedinstigated once a dispute has been lodged

If dispute lodged after legal proceedings If dispute lodged after legal proceedings have been instigated, creditor must no have been instigated, creditor must no take any further steps save to the take any further steps save to the minimum extent necessary. minimum extent necessary.

Social security, hardship Social security, hardship variations and FOSvariations and FOS

FOS has released their position in FOS has released their position in relation to debt collection and social relation to debt collection and social security recipients. Their position is security recipients. Their position is contained in their publication of ‘The contained in their publication of ‘The Circular, Issue 2 April 2010 – Debt Circular, Issue 2 April 2010 – Debt Collection and social security Collection and social security recipients’.recipients’.

Credit Ombudsman Service Credit Ombudsman Service (COSL)(COSL)

Phone number: 1800 138 422Phone number: 1800 138 422 Website: Website: www.cosl.com.auwww.cosl.com.au Can direct the creditor to vary the terms Can direct the creditor to vary the terms

of the contract even if the credit limit of the contract even if the credit limit exceeds the hardship threshold.exceeds the hardship threshold.

Rules on legal proceedings similar to FOS.Rules on legal proceedings similar to FOS. Stance on allowing additional time to Stance on allowing additional time to

refinance or sell.refinance or sell.

Other Variations COSLOther Variations COSL

Apart from the NCC, COSL also Apart from the NCC, COSL also suggests it is open to the lender to:suggests it is open to the lender to:

Allow the borrower time to sell Allow the borrower time to sell the property or refinance;the property or refinance;

Reverse default fees, default Reverse default fees, default interest and enforcement costs;interest and enforcement costs;

Waive part of the arrears of Waive part of the arrears of principal. principal.

Additional time to sell or Additional time to sell or refinancerefinance

COSL will consider whether a creditor COSL will consider whether a creditor should allow time to sell or refinance should allow time to sell or refinance if there is a reasonable prospect of if there is a reasonable prospect of thisthis

COSL will consider whether borrower COSL will consider whether borrower has equity in property. has equity in property.

Court order for variation of Court order for variation of credit contractcredit contract

Section 74 of the NCC allows a debtor to Section 74 of the NCC allows a debtor to apply to a court to vary the credit contract apply to a court to vary the credit contract as set out in s 72.as set out in s 72.

Creditor must be obligated by law to Creditor must be obligated by law to consider variation.consider variation.

Court = Federal Magistrates Court (FMC)Court = Federal Magistrates Court (FMC) At present, no information about any At present, no information about any

debtors applying to FMC for a variationdebtors applying to FMC for a variation

Mortgage Health MonthMortgage Health MonthSeptember 2011September 2011

The aim of Mortgage Health Month is to The aim of Mortgage Health Month is to encourage consumers who are or at risk of encourage consumers who are or at risk of being in mortgage stress to take being in mortgage stress to take early early actionaction when they spot the signs of when they spot the signs of financial difficulty. financial difficulty.

ASIC have released new fact sheets on ASIC have released new fact sheets on their MoneySmart websitetheir MoneySmart website

ASIC also have a mortgage stress ASIC also have a mortgage stress brochure. For copies contact ASIC’sbrochure. For copies contact ASIC’s Infoline Infoline on 1300 300 630 .on 1300 300 630 .

Any questions?Any questions?

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