Credit Managers cannot ignore the issue of debtor hardship.

 Not only are there legal ramifications for failure to set up and operate an adequate hardship policy but there is also a sound business case in doing so.

 This article is based on the assumption that your business is legally required to operate a hardship process.

 The starting point is that there is no binding and accepted definition of hardship, so every process requires a degree of flexibility.

 You must have a detailed hardship policy and defined practices and you must ensure that the principles are followed.

 I recommend that the policy cover two distinct areas, namely consumer debts and business debts. 

 In addition, there should be a clear definition between “hardship” and “extreme hardship”.

 “Hardship” would cover the situation where a debtor cannot pay or enter into a meaningful arrangement at present but expects to be able to in the future.  Examples of this would include illness, with recovery underway or loss of job but expectation of obtaining another one shortly.

 “Extreme Hardship” would cover life changing events such as major illness, major injury, loss of job with no prospect of another one.

 The policy would clearly need to provide for files to be flagged and taken out of the collections process.

 In addition to files where there has been a claim by a debtor or third party acting on its behalf of hardship, the process should also flag files where there is an obvious hardship situation, such as someone suffering a mental illness or just clearly incapable of managing their own financial affairs.

 Files which have been flagged should be transferred to a centralized hardship officer or, depending on the size of the business, a hardship group and should not be dealt with by any standard collections person.

 The hardship files should be reported upon on a weekly basis, in summary form, in order that you may pick up on trends.  For example, if there is a clear increase in hardship cases as a percentage of total invoices, then this may indicate that the credit system itself is deficient, in that credit is increasingly being granted to customers who are in a weak financial position.

 The policy should cover off on processes for handling and dealing with third party advisers. 

 The reality is that processing hardship claims can be expensive in terms of time spent and risk of complaints being made to consumer bodies and/or the media.

 Thus, the policy should preferably be focused on dealing with applications quickly and economically.

 For every business, there is a quantum of debt where it is simply uneconomic to pursue and these claims should simply be written off.

 In our experience of acting for over 56,000 clients across Australia, covering all sizes and business types, most hardship applications are genuine.

 Accordingly, the starting point for applications for smaller debts should be to simply accept that they are genuine, rather than wasting time to verify if they are genuine or not.

 There is no “one size fits all” way of classifying hardship claims, so the policy must allow for a significant degree of discretion to be given to the Hardship Officer.

 A good practice is for the Hardship Officer to talk to the debtor and ask a series of questions.  An experienced officer will quickly pick up if the claim is genuine and will be focused on achieving a quick resolution.  This process cannot normally be handled by email.  A genuine debtor will be more than happy to talk on the phone.

 The end result of a hardship file is to either write the debt off very early in the piece or otherwise set up a “meaningful and sustainable payment arrangement” or an acceptable lump sum payment.

 The fact that a file is within the hardship bucket does not preclude you from ultimately proceeding to a collection option and using processes such as default listing a debtor and/or proceeding to legal action and legal enforcements.  However, I suggest that files which do get moved back into the collection process be subject to review by a more senior manager and that further collections activity be undertaken with a high degree of caution.

 It is not just the threat of action by ACCC which guides many processes but also the concern about reputational damage to the company’s brand.

 By ensuring that the hardship policy is in place and applied will thus not only ensure that there is no breach of the regulations but will provide a counter in the event of a threat being made to harm the reputation of the company.

*Roger Mendelson is CEO of Prushka Fast Debt Recovery Pty Ltd and is principal of Mendelsons National Debt Collection Lawyers Pty Ltd. Prushka acts for in excess of 56,000 small to medium size businesses across Australia and operates on the basis of NO RECOVERY – NO CHARGE. Free call 1800 641 617. The writer is also the author of The Ten Mistakes Businesses Make and How to Avoid Them and Business Survival, both published by New Holland Publishers.

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