If you are suffering from temporary financial hardship (illness, unemployment or other reasonable cause), you have the right to request that your creditor changes your loan contract. This is referred to as a “hardship variation”, or more commonly, “financial hardship”. As of July 1, 2010, all creditors and consumer credit providers are regulated by the NCCP (National Consumer Credit Protection Act), which lays out the requirements of how lenders can deal with consumers, including stipulations for financial hardships.
What is a Hardship?
Financial hardship refers generally to not having enough money to cover living expenses. The important point about hardship is that it is involuntary and short-term in nature. The financial hardship may be caused by either a decrease in income or an unforeseen increase in expenses. Reasons for hardship may include: losing your job, a reduction in overtime, not being able to work due to medical reasons, large medical expenses and unexpected car or house repair expenses.
What are Hardship Provisions?
If you are experiencing hardship, you can contact your creditors and ask for the following changes to be made to your loan contract:
- Reducing interest-only payments
- Extending the term of your loan
- Temporarily stopping on payments
- A freezing of interest (however, creditors are not obliged to provide this)
What variation you ask for will depend on your circumstances. If you lose your job, a temporary freeze on payments might be the best. If you lose your overtime, a reduction in payments might be the best option.
What is a Hardship Threshold?
There is an upper limit to the amount of money that you can claim for hardship. If you entered into a contract on or after the 1st of July, 2011, it’s $500,000. If your loan contract is for more than this amount, you are ineligible.
Prior to this, there were indexed figures based on the ABS (Australian Bureau of Statistics) index of the cost of a new house in New South Wales, plus 10%.
Needless to say, most consumer debts (credit cards, personal loans) will be eligible.
How do I apply for a Hardship Arrangement?
Before you ask your lender or debt collector for hardship, you should work out how much you can afford to pay based on your CURRENT circumstances. Sit down and work out a budget to determine an affordable repayment plan. It is important that you don’t promise something that you can’t deliver.
If you have no income, determine how long is reasonable for you to find work again and get a pay check.
If you want to apply for hardship, you can do so in writing or over the phone. If you do so over the phone, request that everything you agree to is confirmed in writing.
- Call your lender or debt collector and advise them that your circumstances have changed and you can’t make the repayments. You might want to specifically ask for the “hardship department”, and you might need to be insistent about this.
- Tell them what has happened—be as honest as possible. Tell them about your budget and tell them exactly what you can afford to pay.
- Once you reach an agreement, ask that it is confirmed in writing. It is important to write down some details as well, including: (the company you are talking to, the time and date of the call, the name of the person you are talking to, and a summary of what was discussed.
- The lender must respond to your request in writing within 21 Days. If they reject your application, then they must provide a reason.
If you think that the reason they provided for rejecting your hardship application is unfair, you have the right to contact an external dispute resolution scheme.
What are the benefits of Hardship Arrangements?
The main benefit is a hardship arrangement will give you short-term relief from your debts. Since you have approached your creditors, you have not breached your contract and you will generally not be defaulted, so your credit history will not be damaged.
What are the disadvantages of Hardship Arrangements?
You will have to pay your debts back in the end. If your creditors don’t freeze the interest, this will extend the term of your agreement and you may end up repaying more.
Hardship Arrangements are not permanent either. They are subject to review at regular intervals. If your new financial situation is permanent, then you should look at other options, such as informal arrangements, debt agreements, personal insolvency agreements and bankruptcy.
Financial hardship of itself will not damage your credit history; however, many lenders with whom you apply for financial hardship may refuse to extend you further credit, which may reduce your options for managing debt by excluding debt consolidation with your existing lenders.
NB: Debt Mediators does not organise Financial Hardship Arrangements. This information is provided for information purposes only.