People with meagre savings who live month-to-month are rarely prepared in case of an emergency. On top of struggling to cope with the actual emergency, there is also the question of your debts.
For example, if struck down by a sudden illness and unable to work, you may not be able to pay your debts. In such cases, you have the right to request that your creditor adjusts the loan contract to address whatever temporary hardship you may be enduring.
In legal terms this is called a “hardship variation”, more commonly referred to as “financial hardship”.
Since July 1, 2010, all creditors and consumer credit providers have been regulated by the NCCP (National Consumer Credit Protection Act). Specifically, the NCCP stipulates how lenders can deal with consumers, including stipulations for financial hardship cases.
What is Financial Hardship?
Basically, if you want to pay your bills but don’t have the money, you may be in financial hardship. This particularly applies to involuntary, short-term situations. These include a lost job; reduction in overtime; medical issues; unexpected home or car repairs.
Broadly speaking, you may be eligible for financial hardship assistance in the following cases:
- A sudden injury or medical issue
- Any verifiable reduction of income
- Unexpected unemployment
- Separating from a spouse or partner
- A natural disaster
What Hardship Provisions are Available?
In times of financial difficulties, consumers may reach out to their creditors and ask for a range of provisions. In many cases, you may be asked to provide documented evidence to support your claim.
While financial hardship loans are not uncommon, the following are some of the more prudent exceptions asked for during hardship negotiations:
- A reduction in expected interest-only payments
- An extension on the term of your loan
- A temporarily freezing of all debt payments
- A freezing of interest (note that creditors are not obliged to agree to this)
The exception that you ask for really depends on your situation. For example, if you were fired from your job, a temporary freeze on debt payments might be your best option. On the other hand, if you lose out on expected overtime, a reduction in overall monthly payments might be better for you.
What is a Hardship Threshold?
A Hardship Threshold refers to the maximum amount of money that can be claimed for a hardship. For example, if you entered into a contract on or after the 1st of July, 2011, the limit is $500,000. However, if the loan contract exceeds this amount, you will be declared ineligible.
Prior to July, 2011, the threshold was determined using indexed figures that were based on the ABS (Australian Bureau of Statistics). That said, most consumer debts today (such as credit card debts and personal loans) will be eligible for hardship.
How can Australians apply for a Hardship Arrangement?
Consider some careful planning before applying for a financial hardship deal. First, figure out how much you are able to pay off of your debts based on your current situation. Then, put together a budget for an affordable repayment plan. During this phase, take care to be realistic with your projections, rather than optimistic.
For those who have no income and nothing on the horizon, the first step should instead be to calculate how long it will take to find work, get a payment, and resume making payments. Even these dire straights can be taken into account.
Once the prep-work is done, applying for financial hardship can be done in writing or over the phone. Note that if you choose to handle this by phone, make clear that everything you agree to should be confirmed in writing before the deal is closed.
Step-by-step: setting up a hardship arrangement
Here is an informal workflow: use it as a template, to get the financial hardship help that you need:
- Call your lender and inform them that you won’t be able to meet your payments, because your circumstances have changed. Ask for the “hardship department”. Be insistent that you are a hardship case, and you need to speak to the Hardship team.
- Once you have the right person on the line, tell them your hardship story. Be honest. Give them a picture of your budget situation, and let them know exactly how much you will be able to pay back.
- Keep pressing along this route until you reach an agreement over the phone. Then, ask that the details be confirmed in writing. On your end of the phone, keep a notepad and pen handy, and write down some notes of your own. Write the name of the company, the name of the person you are talking to, the time and date of the call, and a summary of what you talked about.
Once an agreement is reached over the phone, the lender is obligated to respond to your request in writing within 21 Days. In cases where they reject your application, they must legally provide a reason.
If the reason given is unfair in your opinion, you may contact an external dispute resolution scheme to mediate.
What are the benefits of Hardship Arrangements?
The primary benefit this system has been designed for is to provide consumers short-term debt relief. Since creditors were contacted as part of the hardship process, there is no breach of contract nor default. This means that your credit history will not take a hit.
What are the disadvantages of Hardship Arrangements?
The main disadvantage is obvious: it is just a short-term solution to provide temporary relief. You will still have to pay back the debts. If creditors did not agree to freeze interest during the hardship period, your total amount owed will be even higher that it was before the hardship.
Hardship Arrangements are also subject to review at regular intervals. If your hardship is long-term or permanent (such as the loss of a limb), then it’s not the right solution for you: consider other options like debt agreements, informal arrangements, personal insolvency agreements or even bankruptcy.
Although financial hardship will not damage your credit history, many lenders may refuse to extend further credit. This may reduce options for managing debt by excluding debt consolidation with your creditors.
NB: This information is provided for information purposes only; DebtMediators.com.au does not organise Financial Hardship Arrangements.