Unable to repay consumer credit after the impact of COVID-19? A guide to options for creditors and debtors

The COVID-19 pandemic has significantly changed many people’s financial circumstances, making an inability to meet contractual obligations highly likely. Both debtors and creditors therefore need to understand their respective rights and responsibilities in these circumstances.

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What is a consumer credit contract?

A consumer credit contract is a credit contract entered into by a natural person, rather than a trust, partnership or body corporate, wholly or primarily for personal or household purposes. It must involve a creditor providing credit to a debtor and provide for interest or credit fees to be paid to the creditor, or for a security interest, while the creditor must be qualified to carry on a credit business. These contracts cover a broad range of arrangements, from buying goods on hire purchase to home mortgages.

How debtors experiencing hardship can apply to change a contract

If a debtor suffers reduced income, employment difficulties or other hardship because of the COVID-19 pandemic, the government lockdown or related circumstances, they may apply to their creditor to change the loan terms and reach a reasonable alternative arrangement that enables them to meet their repayment obligations in full.

However, debtors may not apply in the following circumstances:

• Payments under the contract are more than 2 months overdue;
• They have missed four or more consecutive payments required under the contract;
• More than 2 weeks have passed since they received a repossession warning notice or a Property Law Act enforcement notice for breaching a mortgage contract; or they have already made a hardship application concerning the same contract within the past 4 months, unless the creditor agrees to consider it and the reasons given differ substantially from those in the previous application.

Debtors applying for changes on the grounds of financial hardship must do the following:

• Contact the creditor as soon as they realise they will be unable to make payments when due;
• Provide as much information as possible to substantiate the hardship, such as an employer’s letter confirming a pay cut, a redundancy letter or a medical certificate, and explain how it relates to the request to reduce or defer payments.
• Propose reasonable contractual changes based on the hardship. The proposal must include one of the following:

Extend the contract term and correspondingly reduce each instalment;

Defer the payment dates specified in the contract for a defined period, without a corresponding change to the annual interest rate; or

Both extend the contract term and defer the contractual payment dates for a defined period, without a corresponding change to the annual interest rate.

Particular points to remember:

• Debtors should ensure that any proposal goes no further than is necessary to enable them reasonably to expect to discharge their obligations under the contract. In other words, it should be fair and reasonable to both borrower and lender.
• Debtors must understand that extending the term may increase the total amount they ultimately repay. Interest may accumulate during a payment deferral, and the longer repayment takes, the more interest will be payable.

If a lender does not accept a reasonable request, or rejects it without adequate reasons, the debtor may bring a complaint before a court or tribunal, lodge a counterclaim or refuse to make repayments. The debtor may even complain to the Commerce Commission.

How creditors should respond to hardship applications

Creditors must respond to debtors within 5 working days of receiving a hardship application, even if the debtor has not provided sufficient information. If the creditor requires additional information, the debtor must provide the required information to the debtor within 10 working days. The creditor must give the debtor written confirmation of acceptance or rejection within 20 working days of receiving the original application, or within 10 working days of receiving additional material.

Creditors are also subject to the following restrictions:

• Creditors may not charge for assessing a hardship application or related work. However, if approving an application requires new terms and a new credit contract to be prepared, they may charge an administrative fee to reasonably compensate them for changing the credit contract.
• While assessing a hardship application, creditors may not repossess consumer goods covered by the contract unless they have sufficient grounds to believe the debtor may dispose of them, for example if the debtor threatens to sell the goods.
• Creditors must act fairly and reasonably. They must have genuine and sufficient grounds for rejecting a hardship application and must give the debtor written reasons for any rejection. Creditors should therefore exercise caution when rejecting applications and seek an outcome that is fair to both parties. Creditors must also comply in all circumstances with the Responsible Lending Code (Consumer Protection - Responsible Lending Code), which requires them to provide as much assistance as possible with debtors’ applications and gives creditors information on the assistance they can offer.

Creditors should also understand that if a debtor breaches any contractual changes agreed on hardship grounds, they retain their usual enforcement rights. However, if they reject a hardship application without sufficient grounds, they may encounter difficulties enforcing the contract if the debtor objects.

Whether you are a debtor experiencing financial hardship and needing assistance, a creditor needing to assess and respond to a hardship application, or a party needing to revise a supplementary agreement to a credit contract, seeking professional legal advice is recommended. This is particularly important for substantial credit contracts, such as home mortgages, which may involve valuable or particularly important assets. Obtaining legal advice beforehand is crucial in these circumstances.