better banking

Hardship and financial difficulty

11 Jun 2015

Illness, injury, unemployment, a relationship breakup and over-commitment can put stress on a person’s financial situation.  Whether you are an individual or a business, being unable to meet your repayments on a loan can be worrying.

Some hardship-related complaints we investigate might have been resolved earlier if the complainant had told their bank of their financial difficulty.  Banks and other lenders can help customers through hardship and financial difficulty, but it is important they know before problems get too serious. 

Consumer credit contract legislation has recently changed and this guide explains how these changes apply to situations of hardship and financial difficulty.

 

What should I do if I can’t meet my repayments?

If you can no longer meet regular debt repayments because your financial situation has changed, you should contact your bank. The sooner you do, the more likely it will be able to assist you.

You may be able to extend the term of your loan, adjust repayment amounts or seek a mortgage repayment holiday.

If your financial situation is unlikely to improve in the short term (three to six months), varying or putting a temporary hold on repayments may not be in your best interests. It may be better to seek financial advice about other options for managing your debt, for example selling an asset. Delaying an unavoidable default will likely mean you end up owing even more.

 

What is a mortgage repayment holiday?

If your bank agrees to grant a mortgage repayment holiday, you make no repayments during the agreed period. However, while this provides temporary relief, you end up owing even more. This is because loan interest continues to grow and is added to your debt. So, at the end of the holiday, you will need to either increase repayments to repay the loan within the original term, or extend the term of the loan.

If your bank grants you a mortgage repayment holiday, make sure you know:

  • the total amount owing on your loan at the end of the holiday

  • your new repayment amount, and/or

  • the new term of your loan.

This will help you decide which option is better for you.

 

Does my bank have to assist me?

No, but they must consider offering assistance. Under the Credit Contracts and Consumer Finance Act 2003 borrowers in financial hardship can ask their lender for a change to their contract such as a mortgage repayment holiday or extension to the term of the loan, or both. Before 6 June 2015, you could not make a hardship application under the Act if you were already in default. You can now apply for a change if you are in default, but you must have been in default for less than two months and missed no more than four consecutive payments. You must explain in writing why you can't make your repayments - e.g., because of illness, injury, loss of employment, or the end of a relationship.  

Banks must give proper consideration to hardship applications. In our view, proper consideration includes:

  • ensuring it has all necessary information to assess the application

  • considering a customer’s entire financial position

  • taking into account legitimate considerations applicable to the customer’s circumstances

  • having a bank-wide policy dealing with the application in a timely fashion

  • documenting its decision-making process

  • providing the customer with reasons for its decisions.

The Act does not require lenders to agree to assist, and your bank is free to make its own commercial decisions about whether to lend to you or agree to alternative repayment arrangements. However, banks are typically open to working through financial issues with customers, particularly if approached early. From June 2015 all lenders including banks are also required to:

  • comply with lender responsibility principles when assessing the application

  • acknowledge the application within five working days and notify its decision within 20, and

  • provide written reasons if declining your application.

 

What can I do if I am in financial difficulty but my bank will not assist me?

If you are in financial difficulty you should contact your bank first. If you are not happy with the proposed resolution and your lender is a Banking Ombudsman Scheme participant, you can contact us.  We can consider complaints about a bank’s breach of a statutory obligation or industry code.

Bank decisions about whether or not to provide assistance are often commercial ones and therefore fall outside our jurisdiction to investigate.  However, we may be able to look at related service and communications issues.  If we can’t help, we’ll point you in the right direction.

If your lender is not a scheme participant, it must be a member of another dispute resolution scheme.  To find out which one, look up the name of your lender on the Companies Office website.  You can see a list of our scheme participants here.

The Insolvency and Trustee Service and Federation of Family Budgeting Services may also be able to help. If you think your lender has unfairly declined your hardship application, you can ask the courts or Disputes Tribunal to change the terms of your contract.

 

Case note

Ms W was made redundant.  She was looking for work but was concerned about meeting loan repayments without income so approached the bank for a loan repayment holiday.  The bank declined her application as it didn’t usually offer loan repayment holidays.   It also declined an application for an additional personal loan.

We found Ms W was eligible to apply for hardship assistance under the Credit Contracts and Consumer Finance Act 2003. This meant the bank was required to give proper consideration to her hardship assistance application but after doing so, wasn’t obliged to approve it.  Generally speaking, a bank’s decision about whether to change a credit contract is a matter of its commercial judgement. 

In Ms W’s case we found the bank could have done more to keep Ms W informed during the process but it had given proper consideration to her application.

 

Download a pdf version of this Quick Guide.