Last updated 14 January 2019
Bringing payments up to date
If the current payments (including any due since the default notice was sent) are paid, then the lender cannot take further action (s 89 National Credit Code (Credit Code)).
If a borrower gives notice and then takes legal action alleging a mistake in an account statement, the lender is unable to enforce the contract until the matter is resolved (s 38 Credit Code). Differing time limits (as little as 14 days) for disputing an account apply depending on the nature of the contract and when an account statement is received.
The borrower may make a claim on unemployment, accident or sickness insurance if insured. Many insured borrowers are unaware that they are insured. Borrowers should check their contracts.
The borrower may be able to get better terms and conditions by shopping around and refinancing the loan. Refinancing may increase the cost of the loan.
Selling secured asset
It is possible to introduce a buyer for the borrower’s secured goods. If the lender refuses the sale of the secured goods to the introduced buyer and they later repossess and sell the goods at a lower price, then the borrower has a right to recover the difference between the original sale price offered and the eventual sale price from the lender.
Surrender any secured goods
Borrowers can arrange to give up possession of the car, house or goods secured by the loan so that the lender can sell the goods and recoup some of the loan. A financial counsellor or lawyer can advise if this is the best option and give tips on what to do (e.g. taking photographs of the goods to confirm their condition before surrender).
The borrower undertakes to assign the benefit of an anticipated lump sum (e.g. a compensation payment) to the lender in return for a postponement of enforcement action or suspension of periodic payments. The lender is not obligated to accept such an arrangement.
If the equity in a car loan does not exceed $7900 (this amount is updated each year) it may be possible to keep repaying the car loan but file for bankruptcy covering other debts. Similarly, a housing loan with negative or little equity might be quarantined. Legal assistance should be sought before a borrower considers such an option.
The Australian Financial Complaints Authority can consider redress for loans not made responsibly.
The lender may have failed to assess whether the credit contract or increase in credit limit was suitable by failing to ask about the borrower’s requirements and objectives, financial situation and failing to assess capacity to repay or failing to provide a preliminary assessment on request and verify the information provided (s 120(1) National Consumer Credit Protection Act 2009 (Cth) (NCCP Act)).
Section 131 of the NCCP Act provides that credit will be ‘unsuitable’ where:
- it is likely that the consumer will be unable to comply with their financial obligations under the contract, or not without substantial hardship
- the contract will not meet the consumer’s requirements or objectives
- the National Consumer Credit Protection Regulations 2010 (Cth) (NCCP Regulations) provide circumstances in which a credit contract is unsuitable.
The NCCP Regulations provide that a credit contract will be unsuitable:
- if the lender offers two or more loans rather than one loan for the amount of money that the borrower requires
- if the interest charged under the combination of the contracts is higher than the maximum that could be charged under a single credit contact
- for credit cards initiated after 1 January 2019 or for credit card limit increases after that date, the new credit card limit is beyond the consumer’s ability to repay within a designated time period (as set out by the Australian Securities and Investments Commission (s 118(3AA)).
The NCCP Regulations give an example for an unsuitable credit contract.
More information on what happens if the lender does not meet the responsible lending obligations and time limits for taking action can be found in the Regulatory Guide 209 Credit Licensing: Responsible Lending Conduct published by the Australian Securities and Investments Commission and the AFCA Approaches published by AFCA.
The borrower, guarantor or mortgagor has two years from the contract’s end to apply to the court to re-open a contract on the basis that it is harsh, unconscionable or oppressive.
If the contract is declared unjust, the court can make an order setting aside the agreement or relieving the borrower, guarantor or mortgagor of some or all of the payments. It is not easy to prove that the terms of a contract are unjust.
Section 76(2) of the Credit Code provides a list of factors that the court considers in determining if the contract is unjust for example:
- the consequences of compliance or noncompliance with the contract
- the relative bargaining position of the parties to the contract
- whether the provisions of the contract were the subject of negotiation when the contract was entered into
- whether it was possible for the person loaning the money to negotiate to alter or reject any of the terms in the contract
- whether any provisions of the contract were unreasonable
- the impact of the age, or physical or mental condition of the borrower
- whether the contract was in a form and using language that was able to be understood
- whether independent legal advice was obtained by the borrower
- whether the provisions of the contract were accurately explained to the borrower and whether the credit provider took measures to ensure that the borrower understood the contract
- whether undue pressure or influence was used by the lender or any of their agents
- whether reasonable measures were taken to ensure that the borrower understood the terms of the contract
- whether the lender knew or should have known that the borrower was already experiencing financial hardship before entering the loan contract
- whether any legal advice was sought by the borrower.
While any one factor might be enough to show that a contract was unfair and should be set aside, contracts that include all the factors in s 76 of the Credit Code might be of insufficient severity for a finding that the contract was unjust. Specific legal advice should be obtained by anyone who alleges that a credit contract is unjust, as unsuccessful legal action may result not only in the confirmation of the contract but also significant legal costs. If a contract is found to be unjust it might be set aside in its entirety or the terms of the contract changed.
In addition, a term of the contract may be unfair under the unfair terms protection in the Australian Securities and Investments Commission Act 2001 (Cth). If a term of the contract is deemed unfair, the term is not applied, however, the contract otherwise remains enforceable.
In either case, the consumer can complain to AFCA.
Unconscionable interest and other charges
A court can also set aside unconscionable interest rate changes during the term of the loan or other specified credit charges (s 78 Credit Code).
If a break cost (ending a mortgage early) does not reflect the lender’s loss, it may be challengeable (see RG 220 Early termination fees for residential loans: Unconscionable fees and unfair contract terms). There is a limit on the amount and calculation of break costs or mortgage exit fees that can be charged.
Application must be made within two years of the interest rate change or other charge taking effect, or of the contract ending (s 80(2) Credit Code). Note that s 78 is not available if the borrower alleges that the interest rate at the start of the contract was unconscionable; only interest rate changes during the term of the loan are reviewable under this section.
Variation of credit contract due to hardship
Borrowers experiencing short-term financial difficulties (‘short term’ meaning with the lender’s help they will be able to get the loan back on track) can ask the lender in writing to reduce, extend or postpone loan repayments. Borrowers can refer their case for free to dispute resolution with AFCA, which has the capacity to stop legal proceedings and to substitute a lender’s decision. In addition, the borrower can apply to the court for an order varying the terms of the loan and stopping further enforcement of the loan (s 74 Credit Code). Applications to court are limited to:
- cases where the original loan was made after 1 March 2013
- loans for less than $500 000 that were made between 1 July 2010 and 1 March 2013
- loans made before 1 July 2010 and the amount lent was less than a certain threshold (see the Australian Securities and Investments Commission’s Moneysmart publication for more information).
Borrowers with loans above the threshold will still have rights for hardship relief if the lender has signed an industry code, but they may not have a right to enforce hardship relief in court.
Application for hardship relief
A six-step guide to apply for hardship relief:
- See a free financial counsellor if there is time.
- Prepare a proposal to get back on track (i.e. reduced payments and extended loan).
- Write a hardship request to the lender with the cause of hardship and details of the proposal. The lender must respond within 21 days to the proposal (s 72 Credit Code).
- If the lender takes the case to court, sends out a Section 88 Notice, refuses the hardship variation or fails to respond, then the borrower should immediately lodge a dispute with AFCA (free of charge).
- Seek free legal advice from a community legal centre or Legal Aid Queensland.
- Comply with the procedures of the dispute resolution service or take an application for hardship relief to the Federal Circuit Court of Australia after obtaining legal advice.
In making an application to the Federal Circuit Court of Australia, the borrower can seek an order that the contract be changed by:
- extending the period of the contract and reducing the amount of each repayment
- postponing during a set period the dates on which repayments are due
- extending the period of the contract and postponing during a set period the dates on which repayments are due.
The variation request could include postponing or reducing payments for a set period to allow the borrower time to sell the property.
Superannuation and mortgage relief
Accessing superannuation—compassionate grounds mortgage assistance
Consumers can ask their superannuation fund to release some of their money if they are facing repossession of a home by a lender or local council (as well as on other grounds outlined below).
The application for early release of super is made to the federal Department of Human Services.
Superannuation is protected in bankruptcy but not if it is accessed early. Taxation consequences also apply to early release of super. Check with the Australian Taxation Office how much of the early release will go towards the mortgage repayments. If you are in receipt of family tax benefits, then you need to assess the impact of early withdrawal of super. Centrelink will treat Super as income for the financial year in which it was received when calculating entitlement to family tax benefit, or will retrospectively impose a debt for overpayment.
If home repossession or bankruptcy is unavoidable despite accessing superannuation money, then it may not be in the best long-term interests to make this application.
Accessing superannuation—severe financial hardship or compassionate grounds
There are different criteria for accessing superannuation early for severe financial hardship or for specific compassionate grounds such as medical expenses, unemployment, illness or terminal illness.
The maximum that can be accessed is $10 000 per 12-month period for severe financial hardship (if the fund permits it and there are sufficient funds in the superannuation account). A consumer can only access their super on severe financial hardship grounds if they have been on government benefits for 26 weeks continuously. If the application is for specific compassionate grounds, the criteria are different.
Total and permanent disability/life insurance under superannuation
If the consumer is unable to work due to illness, accident or injury, they may have rights additional to the right to a personal injuries claim. Their superannuation (there may be more than one fund) may have insurance which they can access (contact the super fund to discuss this).
Seek legal advice about personal injuries in a superannuation claim. Some law firms will check if a claim is worth your while for free. Consumers would need to be clear about the consequences of this type of claim on government benefits, liability for taxation and legal costs before proceeding.