Dealing with a financial crisis
A financial emergency can strike at any moment, but you don’t have to deal with it alone
In July 2010, the federal government passed a new law designed to help people who are going through tough times. Under Section 72-75 of the National Credit Code, an individual who is struggling to make ends meet due to a change in their personal situation can re-negotiate their mortgage and credit payments with their bank.
On grounds of financial hardship, this law protects the debtor from getting sued or incurring penalties for breach of their credit contract.
While everyone knows what can cause financial hardship (things such as job loss, illness, natural disasters), the details behind this important reform are little understood. At the very least, it means that since 2010 banks are required by law not to list the matter on the debtor’s credit report. This is important because it would have otherwise made it harder to borrow money in the future. The law also prevents banks from charging additional default fees and default interest payments as long as the debtor complies with the new and temporary arrangement.
The keyword here is temporary. Arrangements usually last anywhere between several weeks to a few months, depending on the situation. Financial hardship reforms were introduced just over a year after the Black Saturday bushfires in 2009, when more than 3500 buildings were destroyed, including 2100 homes.
Unfortunately, the latest bushfire season has taken an equally devastating emotional and financial toll on thousands of displaced and dispossessed individuals, this time not just in Victoria but up and down the eastern seaboard and across the country.
During this time, it is worth remembering the consumer rights set in place 10 years ago for such a major crisis. The big four and the regional banks have stepped up this time with more concessions and financial support, including temporary accommodation for those who have lost their homes. Some are also eligible for a few thousand dollars, such as community volunteers, banking staff who are directly affected, fire services staff and volunteers.
There’s a range of interim arrangements that individuals and businesses can negotiate with their bank on grounds of financial hardship. They are also available as part of an insurance claim depending on the bank. For example, most banks have announced an emergency assistance package for people impacted by bushfires. According to the Australian Banking Association, banks should be able to: •
Reschedule loan repayments to a later date; •
Waive fees and charges, including break costs on early redemption of farm management deposits; •
Get a debt consolidation loan to manage repayments;
•
Restructure existing loans free of the usual establishment fees; •
Defer interest payments on a case-bycase basis; •
Offer additional finance to help cover cash flow shortages; •
Defer credit card payments; • Increase emergency credit card limits. For insurance claims and financial counselling, the Financial Rights Legal Centre (financialrights.org.au) and National Debt Helpline (1800 007 007) can also help.
A word of caution. The latest legislation prevents banks from listing a financial hardship arrangement in their borrower’s credit report. However, there are early discussions about possible changes from 2021 onwards (so this won’t affect this year’s borrowers for the time being).
There are also new rules that could make it legal for banks to share financial hardship data (with the borrower’s approval). This could disadvantage consumers in the future and there are not-for-profit organisations, such as the Financial Rights Legal Centre, that are voicing their concerns to the government about these proposals.
Michelle Baltazar is editor-in-chief of Money. She has worked on various finance titles including BRW (now closed) in Australia and Shares magazine in London.