Hardship - Consumer Credit Contracts Under a Covid-19 Related Lockdown

Section 55 of the Credit Contracts and Consumer Finance Act 2003 ("CCCFA") provides that a person who is unable reasonably, because of illness, injury loss of employment, the end of a relationship, or other reasonable cause, to meet their obligations under a consumer credit contract and who reasonably expects to be able to discharge their obligations if the terms of the contract were changed as provided for under the CCCFA may apply to a creditor to agree to that change. In the present Covid-19 lockdown, we expect these provisions to be tested and both debtors and creditors need to know their rights and responsibilities in these sorts of situations.

A "consumer credit contract" is any contract entered into by a natural person (ie not a trust, partnership or body corporate) where credit is provided that is intended to be used wholly or predominantly for personal, domestic or household purposes.  The contract needs to provide credit from a lender to a debtor and either provide for interest payments, credit fees or a security interest to be provided to or made to the creditor and the creditor needs to be in the practice of or in the business of providing credit.  A consumer contract can be anything ranging from a purchase of goods on a hire purchase type arrangement, right through to a mortgage on a domestic dwelling.

What This Means if you Suffer Hardship as a Debtor

If a debtor suffers a loss of income or employment or other hardship – which may well be related to Covid-19 or the Government lockdown - they may apply to a lender to amend their loan terms with a reasonable alternative plan that will enable them to repay obligations in full.

A debtor cannot make this application if they have:

• been in default in making payment under the contract for more than 2 months;
• missed four or more consecutive payments due under the contract;
• been in default for more than 2 weeks after receiving a repossession warning or a Property Law Act Notice issued by a mortgagor when they are in default under their mortgage; or
• made a previous hardship application within the last four months in respect of the same contract unless the creditor agrees to consider it and the reasons are materially different from the prior application.

To apply for an amendment due to hardship a debtor should:

• contact the lender as soon as they realise they will not be able to pay what is due;
• provide as much information as they can about the reason for hardship – such as a letter from an employer where income has been reduced or a letter making them redundant or a medical certificate - and this should be accompanied by an explanation as to how that relates to a need to reduce payments or have a suspension of payment.
• set out a reasonable proposal to vary the contract due to hardship and should propose to either:
  -  extend the term of the contract and reduce the amount of each payment accordingly;
  -  postpone, during a specified period, the dates on which payments are due under the contract (without a consequential change
      being made to the annual interest rate/s); or
  -  both extend the term of the contract and postpone, during a specified period, the date on which payments are due under the
      contract (without a consequential change being made to the annual interest rate/s).

In making any proposal, a debtor should ensure that the proposal is not more extensive than necessary to enable the debtor to reasonably expect to be able to discharge obligations under the contract.  The proposal needs to be fair and reasonable to both parties.

A debtor needs to be aware that they may end up paying more on the loan over a longer term, since the debt may continue to accrue interest in a suspension period or more interest may be charged where a loan is repaid over a longer period.

If a lender does not entertain a reasonable request, or declines it without giving appropriate reasons, a debtor may then may be able to apply to Court or the Disputes Tribunal or set up a counter-claim or otherwise resist enforcement of the debt.  A debtor may even complain to the Commerce Commission.

What the lender needs to do when receiving a hardship claim is in the next section.  

What This Means if you Receive a Hardship Claim as a Lender

A lender needs to advise a debtor within five working days of receiving the hardship application, even if the debtor does not provide the lender with sufficient information.  If the lender needs further information then the lender must let a debtor know that information within 10 working days.  The lender is required to give a written response to the debtor – either responding or declining the claim – and they must do so on the later of the date that is 20 working days from the date of the original application or 10 working days after receiving any additional information requested from the debtor.

• The lender cannot charge a fee for considering the hardship application or any related work but if they need to re-document a new credit contract on new terms on granting a hardship application, they may charge  a credit fee that reasonably compensates the creditor for reasonably documenting the changes to the credit contract.
• A lender cannot repossess consumer goods while they consider the hardship application unless they have reasonable grounds to consider the goods are at risk of being disposed of by the debtor (eg the debtor threatens to sell them).
• A lender needs to act fairly and reasonably, as such the lender should only decline the hardship application if there are genuine reasons for doing so and, if the application is declined, the lender must advise the debtor in writing why the application is declined.  A lender should therefore be cautious when declining hardship application and try to reach an outcome fair to both lender and debtor.   A lender also needs to comply with the Responsible Lending Code at all times (which can be located here: Consumer Protection - Responsible Lending Code).  This includes a requirement to assist the debtor as much as possible with their application and to provide information to the creditor to assist the application.

A creditor should bear in mind that if the debtor breaches any agreed amendment to the contract that is agreed on hardship grounds, the creditor will still have its usual enforcement remedies available.  However, if a creditor declines a hardship application without good reason they may encounter difficulty in enforcement where the debtor challenges that decision.

If you are a debtor in a position of hardship and need assistance or a creditor needing to assess and respond appropriately to debtors making hardship claims – or re-document an agreed amendment to a credit contract, we are happy to help. Remember, some very large credit contracts (such as mortgages over houses) can involve large amounts or very important assets, so legal advice could be critical to assist in these sorts of situations.

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