With the passing of the Consumer Credit Legislation Amendment (Enhancements) Bill 2012, new financial hardship application procedures will commence from 1 March 2013.

The changes (particularly a new section 72 of the Credit Code) are expected to make it easier for debtors to seek a variation of the repayments under their contract due to financial hardship by broadening the loans for which variations can be requested by consumers (by removing the $500,000 cap and therefore extending the right to regulated residential investment loans) and by changing enforcement procedures in respect of borrowers who have applied for hardship variations.

It is also expected that more of these types of matters will be dealt with internally by credit providers before a dispute reaches External Dispute Resolution. This assumes that credit providers will change their procedures to recognise hardship applications, especially those made orally. Credit providers can no longer assume that, for example, an oral request for a 1 month moratorium is not a hardship application.

Credit providers will be required to finalise an outstanding hardship application before commencing enforcement procedures, subject to limited exceptions.

When can a hardship application be made?
All debtors will have a statutory right to request a hardship variation of a regulated credit contract regardless of the amount of credit that is provided under their contract.

Currently a debtor only has a statutory right to request a hardship application when the maximum amount of credit provided is less than $500,000.

How can a variation be requested?
The debtor may give the credit provider notice, orally or in writing. There are no formal written requirements.

Branch and call centre staff will need to be trained to recognise an oral request.

There are no prescribed grounds for making an application other than “the debtor’s inability to meet the obligations”.

What types of variations can be requested?
There are no limits to the form of hardship variation that can be requested. Currently there are only 3 options: extending the term and reducing the amount of repayments or postponing repayments for a specified period or extending the term and postponing repayments for a specified period.

What if the credit provider needs more information?
Within 21 days of receiving a hardship notice, the credit provider may give the debtor a notice requiring the debtor to give the credit provider within 21 days information relevant to deciding whether and how to change the credit contract to address the debtor’s inability to meet the debtor’s obligations under the contract.

The debtor must comply with the requirement to provide more information if the information is relevant.

Must the credit provider agree to make a change?
The new section notes that the credit provider need not agree to change the credit contract, especially if the credit provider does not believe there is a reasonable cause (such as illness or unemployment) for the debtor’s inability to meet his or her obligations or reasonably believes the debtor would not be able to meet his or her obligations under the contract even if it were changed.

If the credit provider and the debtor agree to change the credit contract, the credit provider must give the debtor notice of this. This notice must be in the form prescribed by the regulations (none have been made yet), and must record the fact that the credit provider and the debtor have agreed to change the credit contract.

If the credit provider does not agree to change the credit contract, the credit provider must give the debtor a notice. This notice must be in the form prescribed by the regulations (none have been made yet), and record:
• the fact that the credit provider and the debtor have not agreed to change the credit contract;
• the reasons why they have not agreed;
• the name and contact details of the approved external dispute resolution scheme of which the credit provider is a member; and
• the debtor’s rights under that scheme.

A breach of this section will attract a civil penalty of 2000 penalty units. This amounts to a maximum of $220,000 for individuals and $1,100,000 for corporations, partnerships or multiple trustees.

When must the credit provider’s notice of agreement or rejection be given?
The credit provider must give a notice by a specified deadline, as follows:
• if the credit provider did not require further information from the debtor, this notice must be given 21 days after receiving the hardship notice from the debtor;
• if the credit provider required further information from the debtor but did not receive any information in compliance with the requirement, this notice must be given 28 days after the day of making the requirement; and
if the credit provider required further information from the debtor and received information in compliance with the requirement, this notice must be given 21 days after receiving the information.

A regulation-making power allows the regulations to prescribe a lesser amount of days than is proposed in the amendments for various actions to be completed. This is to allow, pending further consultation, shorter time periods to be specified for different classes of contracts (particularly small amount credit contracts).

If, as a result of negotiations, the credit provider agrees to a change to the terms of the credit contract, they must comply with the existing requirements in section 73 of the Code.

Where a credit provider does not agree to change the terms of the credit contract, a debtor still has the option to apply to a court for a change in the terms pursuant to section 74 of the Code. The court is restricted from making any order that reduces the total amount ultimately payable by the debtor under the credit contract, and is therefore confined to orders affecting the amount and timing of individual payments made under the credit contract.

When can enforcement proceedings commence?
The requirements in section 88 of the Code, requiring credit providers to give a default notice before they can commence enforcement proceedings against a debtor will not change but a new section 89A restricts the capacity of credit providers from commencing enforcement action until they have responded to any hardship notice under section 72.

A credit provider will be prohibited from commencing enforcement action when the following conditions apply:
• they are required to serve a default notice under section 88;
• the debtor has given a current hardship notice under section 72; and
• the debtor has not previously given a hardship notice or had given one not materially different from the current hardship notice in the four month period before the current hardship notice was given.

The credit provider cannot begin enforcement proceedings until they have given the debtor notice stating that the credit provider and debtor have not agreed to change the credit contract and 14 days have passed from the day on which this notice was given.

Under the current section 88, the credit provider must allow the debtor at least 30 days from the date of the default notice to remedy the default. The 14 day period may end before, at the same time as, or after the end of the period for remedying the default specified in the default notice.

A breach of this section will attract a criminal penalty of 50 penalty units and is an offence of strict liability.

Can a debtor make a postponement request after a default notice has issued?
Yes. A debtor who has been given a default notice can make a postponement request regarding postponement of enforcement proceedings or of any acceleration clauses.

If a debtor gives the postponement request the credit provider must not begin enforcement proceedings unless they have responded to the postponement request and 14 days has elapsed from when they gave that response.

A breach of this section will attract a criminal penalty of 50 penalty units and is an offence of strict liability.

What do you need to do?
Bright Law can help you review your hardship, dispute resolution and enforcement processes.