Financial hardship, in a credit society such as Australia, can affect almost anyone. To protect consumers from the negative impacts of financial hardship — which can include the stresses of enforcement action and disconnection from essential services — legal protections have been incorporated into the regulatory frameworks for the consumer credit, energy, water and telecommunications sectors.
Particularly since the global financial crisis, there has been significant attention paid to the problem of financial hardship, where a consumer takes on payment obligations under a contract, but becomes unable to meet them when they fall due.
This use of the term ‘financial hardship’ is specific to the context of debt default and payment difficulty in Australia’s consumer credit, energy, water and telecommunications sectors.
Financial hardship is therefore distinct from the separate problem of poverty, even though falling into arrears on mortgage, rent and utility payments has been used as an indicator of deprivation and financial stress in Australian and overseas research on poverty and social exclusion.
Financial hardship encompasses many situations, from falling behind with mortgage repayments to failing to make the minimum monthly repayment on a credit card, or being unable to pay a utility bill.
Primarily, the National Consumer Protection Act 2009 (Cth) governs the law as it pertains to financial hardship (“National Credit Act”).
The National Credit Act contains, at Schedule 1, the National Consumer Code (the “Code”), sections 72, 73, 74 and 75.
ASIC administers the law concerning protections afforded to consumers who are in financial hardship.
Since 2009, sections 72 to 75 inclusive of the Code have governed the obligations on a financial service provider when a consumer seeks to claim protections for financial hardship that they may be facing. It provides for a consumer who is indebted to a service provider to request a change to the terms of their credit contract on the grounds of hardship.
Hardship assistance under any of these legal protections usually involves a variation to the timing of repayments due under the consumer’s contract, such as a moratorium on repayments, or a payment plan allowing the consumer to make repayments in smaller instalments over a longer period of time. Service providers may also, at their discretion, offer measures that effectively reduce the amount of the consumer’s debt, either by way of an incentivised payment plan that matches repayments made on time with money credited to the consumer’s account, or through whole or partial debt waiver.
The two main reasons for financial hardship are:
- The consumer could afford the loan when it was obtained but due to a change in circumstances has occurred post-loan; or
- The consumer could not afford to repay the loan when it was originally obtained.
If the consumer is in the second category then a dispute based on irresponsible lending and/or unjustness could be the outcome should this consumer elect to progress this matter to the ombudsman or the court for determination.
In relation to understanding the triggers required for your businesses to understand when a hardship notice has been provided to them by a consumer the following two preconditions must be met:
- The consumer is unable, for reasons of illness, unemployment or other reasonable cause to meet their obligations. The term reasonable cause is interpreted widely by ASIC, the CIO and FOS, and the Court. They can be such things as a general deterioration in the consumer’s financial situation, a short or long term period of imprisonment, the engagement as an independent contractor for a short period to attempt to save small business, family / relationship breakdown or the death of close family member can give rise to an assessment of hardship (to name but a few); and
- The consumer reasonably expects that they will be able to discharge their obligations under the contract if the contract terms are changed as proposed. It is enough for a debtor to have a reasonable and certain prospect of recommending regular instalment payments within a certain period.
This is known as the Harship Test.
A recent study by the Melbourne Law School at the University of Melbourne, which is the first in-depth study of the practical operations of the financial hardship laws, highlighted a tendency on the part of financial service providers to take a generic, one-size-fits-all approach to compliance with the legal hardship protections that prevents them from adequately engaging with consumers struggling with debt.
Court interpretation of hardship and obligations of financial service provider
The meaning and operation of the hardship provisions under the National Credit Act and the Code has so far been the subject of fairly limited judicial consideration.
The Courts have made it clear that the reasoning in cases decided under the equivalent provisions under the former UCCC are also applicable to proceedings brought pursuant to section 72 to 75 of the Code.
A recent Court decision that came out of the Victorian Supreme Court (Westpac Banking Corporation v Tesoro  VSC 182) in 2012) established the Courts interpretation of section 72 of the Code, and a “hardship test”. Even where the pre-conditions of the Hardship Test are met, the Court still has a wide discretion in determining the correct outcome. In deciding whether or not a credit contract should be varied on the grounds of hardship, the court must consider ‘the whole of the relevant circumstances’, give effect to the purposes and objects of the Code and ‘make a determination which meets the justice of the case’.
A case arose in South Australia (Commonwealth Bank of Australia v Hocknell  SASC 52) shortly after the Victorian Supreme Court decision, where a consumer had made an application for hardship pertaining to a home loan secured over an investment property. In that decision, the Judge found that the justice of the case did not require a variation to the credit contract be granted, as the loan in question was in relation to an investment property, rather than a family home, and the debtor did not require the income from that investment property to meet his living expenses.
(New decision) Sometimes — but not always — the debtor’s right to give a hardship notice under section 72 may justify the exercise of the court’s discretion to set aside a default judgment, even where the debtor has not demonstrated a defence on the merits. In two New South Wales cases (Commonwealth Bank of Australia v Wales  NSWSC 407 and Commonwealth Bank of Australia v Larsen  NSWSC 408 (Callum J)) heard on the same day in the Supreme Court of New South Wales, the Judge stated that the ‘critical consideration’ enlivening the exercise of the discretion in those particular cases was the conduct of the bank — which her Honour described as ‘calculated to defeat the ameliorative objects of the hardship provisions in the National Consumer Code.’ The debtor had ‘endeavoured in good faith to engage the processes contemplated by the National Consumer Code but was defeated by the bank’s passive resistance to those processes.’ In the absence of any comparable conduct on the part of the credit provider, it is unlikely that the discretion will be enlivened.
Despite these New South Wales decision, in practice claims for hardship raised in defences to actions by financial service providers before the Court seeking payment of debts due to breaches of contract, are rarely, if ever, determined in favour of the consumer. In our experience, they are also rarely, if ever, included in a defence by a consumer, although circumstances of financial hardship might exist.
Impecunity and hardship are not consider to be valid defences to debt recovery proceedings. That being said, hardship notice given to a service provider, even during litigation, ought to be dealt with in accordance with the Code. In practicality, commercial resolutions can be reached, costs of litigation can be reduced, or stopped in their tracks, and time consuming and costly applications to CIO or FOS can often be avoided, if these claims for financial hardship raised during litigation by a consumer are adequately dealt with at the time. Even a baseless claim for financial hardship made during litigation, often times to delay or frustrate the court proceedings, can have a positive result, if it causes the consumer to be engaged in a process that leads to a commercial repayment plan and bring court proceedings to and end.
Recommendations made by CIO and FOS in hardship related cases
Disputes in relation to the application and interpretation of section 72 of the Code can arise for a variety of reasons; for example, the credit provider may not respond to the application, or may refuse to vary the contract, or may not suspend enforcement proceedings against the consumer. Usually, the first step for the consumer in these situations is to initiate the credit provider’s own internal dispute resolution process by making a complaint to their complaints officer, either over the phone or in writing, and awaiting a response. If the dispute is not resolved internally, the primary forums to which the consumer may make a complaint against the credit provider are the two independent external dispute resolution (EDR) schemes provided by the Financial Ombudsman Service (FOS) and the Credit and Investments Ombudsman (CIO). Most Australian banks are members of FOS, while many debt purchasers, credit societies and credit unions are members of CIO.
These schemes have the aim of providing an accessible avenue for the resolution of consumer disputes with a minimum of formality and technicality. While these schemes focus primarily on alternative dispute resolution methods such as negotiation and conciliation, it has been suggested that in this context, the term “alternative dispute resolution” is something of a misnomer: for consumers in financial hardship seeking to make a complaint against their credit provider, the free-of-charge service provided by an industry-funded ombudsman is usually “the only viable means of redress, not so much an alternative to the courts.”
Claim by guarantor for hardship pertaining to a business purpose car loan – January 2017
A claim was made by a guarantor to a business purpose car loan that:
- She had not received a notice of assignment (the debt had been purchased);
- Her application for hardship had not been adequately considered; and
- That her offer to pay out the car loan and retain ownership of the vehicle for $10,000 had been accepted and the credit provider was bound to honour this arrangement.
The Ombudsman found that:
- She had received a notice of assignment;
- That her application for hardship could not be determined, as it related in part to a business purpose loan, and without approval from the liquidator of her company (the company had been placed into liquidation) the Ombudsman could not become more involved in that aspect of her dispute, due to any other affect that may have on creditors of the liquidation; and
- That even if the offer of $10,000 have been accepted, which potentially it had not, the credit provider was entitled to withdraw that consent, as the settlement sum had not yet been paid and seek payment of the entire sum.
Claim by consumer on an assigned credit card debt – January 2017
A claim for hardship consideration was made by the consumer to the Ombudsman, seeking that:
- The service provider be ordered to accept a lump sum payment of the debt, which represented 25% of the overall debt;
- The consumer had lodged a hardship notice with respect to the assigned debt in 2014, after the debt was assigned in 2015. Payment plan of $20 per month agreed with the financial service provider. In 2015 a new hardship notice is lodged and the payment plan is reduced to $10 per month.
- In 2015, as part of new hardship notice, the consumer requests the acceptance of a lump sum offer of 25% of the debt.
- It was determined that the service provider acted reasonably and within the scope of its obligations under the Code when dealing with the consumer.
- The service provider significantly reduced the monthly repayment – a five year repayment plan would see them recouping $72 per month on a commercial repayment basis (the Ombudsman sees this as a 3 to 5 year payment plan in most cases).
- The service provider is not obligated to accept the 25% lump sum offer, nor does the Ombudsman view its role in this cases, in the circumstances, as being able to determine that they ought to do so.
Claim by consumer for hardship regarding car loans – October 2017
- The consumers applied for two (2) separate car loans with a dealership. The loan was secured with the assistance of the dealership. The first loan was in October 2012 and the second in September 2013.
- The hardship notice was given by the consumers on 4 September 2015.
- On 7 September 2015, despite being on notice, the service provider sent a notice of demand detailing that repossession was imminent. In the background the service provider sought to determine the hardship notice, however, it was determined by the act of the demand notice being sent and its approach to the hardship determination (requesting documents within short time periods, etc) that the service provider had breached its obligations under section 72 of the Code.
- On 17 November 2015 the vehicles were repossessed, and on 18 November 2015 the consumers lodged their complaint with the Ombudsman.
- The financial service provider was unable to provide us with information to show that it complied with its responsible lending obligations. As such, the Ombudsman drew a negative inference from the non-receipt of this information to infer that the service provider breached its responsible lending obligations.
- After the Ombudsman completed its own serviceability assessment, it found that the consumers could not afford the loans.
- The Ombudsman also found that the financial service provider breached the hardship provisions under the National Credit Code and breached the Code when it repossessed the consumers’ vehicle.
- The Ombudsman recommended:
- The service provider release the consumers from the car loans;
- The service provider remove any adverse credit listings from the consumers records;
- The service provider forgive the balance owing under the car loans in the sum of $11,546.00
- The service provider pay compensation to the consumers in the sum of $11,546.00 due to its breach of the responsible lending guidelines and $700 for non-economic loss for its breach of the hardship obligations.
- Provide the consumers with a written apology.
Claim by bankrupt regarding loan over prime mover – ongoing
- Our client granted a finance facility to a consumer for his trucking business, as a sole trader in September 2015.
- In October 2015, the consumer lodged a debtors petition and declares himself bankrupt.
- Due to the breach of the finance facility (in declaring himself bankrupt) our client lodges a caveat over real property owned by the consumer and repossesses prime mover later in October 2015.
- In November 2015, the bankrupt consumer lodges a complaint with FOS.
- In January 2016, FOS made recommendations allowing financial service provider to retain its caveat (and issue proceedings to maintain the caveat as the proceedings relate to Queensland) but refuse to allow the service provider to sell its prime mover.
- Submissions are made by the service provider to FOS to ensure that this dispute is treated as a test case, as it intends to challenge the outcome, should it find against the service provider.
- FOS elects to close its file, and allow the financial service provider to litigate the matter before Court regarding its entitlement to the caveat and the repossession and sale of the prime mover. Interestingly the reason not to determine had little to do with the fact that the consumer entered into a business purpose loan, and was a bankrupt at the time of his application – two reasons that ought to have limited his access to the Ombudsman.
While the range of circumstances in which a consumer may seek a hardship variation is ostensibly wide, section 72 retains a major constraint on consumer who are likely to succeed in actually obtaining a variation. Namely, section 72(3) implies that credit providers are especially entitled to refuse a variation if the consumer does not expect to be able to resume their obligations within an undefined period of time after a variation is granted. This raises questions as to whether section 72 can be used by consumers experiencing ongoing or entrenched financial disadvantage, as opposed to episodic or short-term payment difficulties caused by an unforeseen financial shock. The exclusion of these consumers is reinforced by the structure of section 72, which requires an individual consumer to initiate the hardship process and, if refused a variation, to take legal action against their credit provider. This presupposes a customer who has a strong awareness of their rights as a consumer, and the confidence and financial resources necessary to commence litigation in the courts under section 74. In practice, of course, FOS and CIO are the primary forums for hearing complaints under section 72. Yet despite the availability of these more informal and generally no-cost dispute resolution services, the fact remains that consumers in long-term financial hardship — particularly those on low or irregular incomes, or with a long-term or chronic illness, or low levels of English literacy — are less likely to be aware, let alone successfully make use of, these provisions.
*RebeccaFahey, Partner, SLF Lawyers
Ph: (03) 9600 2450
SLF Lawyers have offices in Melbourne,
Sydney, Brisbane and Perth