If you’re experiencing financial hardship, you should call the specialist financial hardship team at your bank as soon as possible.
What is the hardship application process?
The National Credit Code – Schedule 1 to the National Consumer Credit Protection Act 2009 outlines the process that banks and their customers must follow in relation to financial hardship.
The old hardship application process
Prior to 1 March 2013, you could make an application to your bank to vary the terms of their contract by:
- Extending the period of your contract and reducing the amount of each payment due under the contract (no change to annual % rate(s);
- Postponing dates on which payments are due for a specified period (no change to annual % rate(s); or
- Extending the period of your contract and postponing the dates on which payments are due for a specified period (no change to annual % rate(s).
In order to be eligible for this you needed to be:
- unable to reasonably meet your credit contract obligations due to illness, unemployment or another reasonable cause; and
- your credit contract needed to be less than $500,000.
After receiving your hardship application to change the terms of their contract, your bank had to give you a written notice of their decision within 21 days of receiving your hardship application.
The new hardship process
Since 1 March 2013, a new hardship process has been implemented under the law.
Rather than applying for specific variations to your contract, you can let your bank know you either can’t afford, or don’t think you will be able to afford your repayments (known as ‘a current or future inability to meet obligations under the credit contract). By telling your bank this you are providing a ‘hardship notice’ under the law. You can give this notice either verbally or in-writing and once you give this notice you and your bank have responsibilities to take actions within certain timeframes.
You do not have to use particular terminology or formally apply for hardship to have your bank take action on the hardship notice.
Once you have given your bank a hardship notice, under the law the bank can require the customer to provide certain information and supporting documentation. The information needs to be relevant to your bank deciding:
- whether you are or will be unable to meet your obligations under the contract; or
- how to change the credit contract.
What information will your bank ask for?
The specific type of information and documentation required depends on a number of factors, including the period of time hardship assistance is required and the type of arrangement that may be offered.
Typically, the information and documentation that may be required includes:
- Statement of Financial Position – outlining income, expenses; assets and liabilities
- Evidence of employment (e.g. payslips, employment contract, tax return)
- Evidence of income (e.g. account statements, Centrelink statement, social security payment details)
- Evidence of medical circumstances (e.g. medical certificate from a qualified medical practitioner, proof of assistance via the disability support pension)
- Other evidence (e.g. separation statement, contract of sale, or consent from joint borrower (where required).
A bank may not require all this information. Banks will strive to minimise the amount of information requested, especially if this information is contained in, or can be derived from, other provided documentation.
How do banks assess hardship applications or a hardship notice?
Typically, banks will take into account the following criteria when assessing whether, and what kind of, hardship assistance may be appropriate:
- Reason for the hardship;
- Financial position, including income, expenses and equity position (banks will consider any assets and their value and any liabilities and outstanding debts);
- The customer’s ability to meet the commitments under the hardship arrangement and future repayments under the contract;
- The customer’s ability to rehabilitate their circumstances (based on whether the hardship assistance will offer genuine relief and whether the customer can restore their financial situation); and
- Whether the customer has received hardship assistance in the past and if it improved their financial situation.
Importantly under the law a bank does not need to agree to change your credit contract. Especially, if they do not believe there is a reasonable cause for your inability to meet your obligations e.g. illness or unemployment, or the bank reasonably believes that you would not be able to meet your obligations even if the credit contract was changed.
How do banks confirm the hardship arrangement?
If a bank decides to provide hardship assistance, you must comply with the repayment terms of any arrangement or agreement.
Under the National Credit Code, banks may be required to provide you with a written notice about agreeing to change the credit contract in prescribed timeframes.
Under the Code of Banking Practice, banks may also be required to provide you with the main details of the hardship arrangement in-writing.
What happens if banks do not agree to provide a hardship arrangement?
Under the National Credit Code, banks do not have to change your credit contract. For example, if they do not believe their is a reasonable cause for your inability to meet your obligations e.g. illness or unemployment, or the bank reasonably believes that you would not be able to meet your obligations even if the credit contract was changed.
Banks will also consider their own commercial interests when determining the appropriateness of a hardship arrangement.
If a bank decides not to provide hardship assistance, banks may be required to explain in-writing to the customer why it took this decision.
Banks may decide not to provide hardship assistance for the following reasons:
- the customer is unable to meet the loan contract’s repayment terms (even if the contract was varied or another arrangement was put in place);
- hardship assistance was previously given to the customer but did not improve their financial situation;
- the Statement of Financial Position or other supporting documentation demonstrates the customer is unable to service the loan (i.e. repayments would not leave the customer with sufficient money for essential items and living expenses) or improvement is not likely;
- hardship assistance would be detrimental to the customer, for example, it could put the customer in a negative equity position with their property ; or
- the customer would be unable to meet their financial obligations in the future.
A decision to refuse hardship assistance is not typically straightforward. After a bank has explained why it refused to provide hardship assistance, it will refer the customer to the collections team, or if debt collection activity is on hold, it will reactivate normal debt collections processes.
What are the next steps if a bank doesn’t provide hardship assistance?
Depending on the circumstances, a bank may still provide other assistance even if formal hardship assistance is declined. For example, a bank may exercise its discretion to help customers with an exit strategy or provide other assistance and advice on a case-by-case basis.
While these situations rarely happen to customers, a bank may consider other options or approaches, including:
- informing the customer about the potential early release of their superannuation (or referring the customer to staff who can discuss their options in more detail);
- providing other options, including time for the customer to sell a property or debt waiver;
- discussing other relevant support measures that might be available (including government programs, such as mortgage assistance schemes); or
- suggesting the customer seek other assistance (including from a professional financial counsellor, financial adviser, legal aid officer or legal practitioner).
If a customer is not satisfied with the response or assistance provided by the bank, customers have the right to make a complaint to their bank or with an external party. Banks are required by both the Code of Banking Practice and the National Credit Code to have an internal complaints handling procedure and hold a membership to an external dispute resolution scheme, such as the Financial Ombudsman Service (FOS).
More information on the complaint process is available here