Financial hardship cases are reportedly the biggest single cause of complaint to The Credit Ombundsman Service. This is where a consumer claims the creditor has issued defaults for late payment of accounts without considering the consumer’s claim of financial hardship. We look at why this is occurring, and what people can do in circumstances of financial hardship to ensure they do not receive a bad credit score from creditors.

By Graham Doessel, Founder and CEO of MyCRA Credit Repairs and www.fixmybadcreditcom.au.

The Credit Ombudsman is continuing to be flooded with complaints. COSL’s annual report for 2011 released early this month showed a 72% increase in complaints from 2010, with financial hardship cases continuing to feature as the single largest source.

Mr Raj Venga, Credit Ombudsman, attributed the significant spike in complaints received by his office to an increase in consumer awareness, and changes to legislation requiring lenders to enter external dispute resolution processes.

“Regrettably, 34% of all complaints we receive relate in some way to financial hardship, specifically the failure of a lender to agree to a payment variation on grounds of financial hardship. This level of financial hardship complaints is similar to previous years and we do not anticipate a reduction in the forseeable future,” Mr Venga says.

“The underlying causes of the financial hardship complaints we see are unemployment or reduced income (30%), cost of living, including other debt (21%), followed closely by illness of the borrower or their family member (19%), business failure (14%), interest rate increases (8%), relationship breakdown (7%) and natural disasters (1%)” observed Mr Venga.

Broker News featured more on Mr Venga’s take on financial hardship issues, in its story ‘Hardship complaints show no signs of easing’. Venga says some lenders issued defaults too quickly.

“We achieved a satisfactory outcome for the consumer in 46% of the financial hardship cases we closed. This suggests that not all lenders are, before issuing default notices or commencing enforcement action, properly considering the possibility that the borrower may be in financial hardship and whether a change in the borrower’s payment obligations may be appropriate in the circumstances,” Venga said.

Creditors can be eager to issue defaults, and it is essential there is a system of redress for consumers – particularly when in times of financial hardship their requests are ignored.

A bad credit score can be debilitating for the consumer for years after the event, with defaults remaining on a person’s credit file for 5 years from the date of listing. People are generally unable to even get a mobile phone plan let alone loans or mortgages.

Applying for financial hardship

If a person’s circumstances change due to unemployment, illness or some other reasonable change in circumstances, they should ask their lender for a hardship variation.

Money Help, a website run by the Victorian State Government offers some help on how to apply for hardship with creditors in the correct way.

“If you wish to ask for hardship consideration, it is always better to put your request in writing as this means you can keep a copy of the request as a record. It is more difficult to prove the details of a request made by phone. If you entered into your loan agreement after July 1 2010, or if your debt relates to a credit card, then your credit provider must respond to you within 21 days of your application.”

Money Help advises people to work out what they can afford to pay prior to requesting a hardship variation. They explain the benefits in applying for hardship can range from more affordable payments, to putting a stop on action towards defaulting your credit file.

Our extra tip is for people to make it clear to the creditor what they are requesting. It would be a good idea to specifically request a ‘financial hardship’ variation to their repayments – in writing, so there is no confusion.

What about if the creditor refuses to agree to a hardship variation?

Creditors are legally required to consider a person’s request for variation on payment arrangements, but are not obliged to agree to any hardship variation proposal put forward. This is the grey area that finds complaints being put forward to COSL in more frequency.

If a lender either refuses or fails to respond to are hardship request within 21 days, (or a shorter time if the situation is urgent) consumers can lodge a complaint with the credit provider’s independent dispute resolution scheme.

What about if the creditor has already issued a default?

If a default has been issued which consumers believe is unjust, unfair, in error or shouldn’t be there, people have the right under Australian credit reporting legislation to have the inconsistency rectified.

The problem with seeking redress as an individual is two-fold. Firstly, without extensive knowledge of credit reporting legislation it can be difficult to enforce ruling that creditors are bound with without knowledge of what the rules are.

Secondly, people negotiating on their own behalf can be problematic in many cases. People have often attempted to remove the default themselves, and have been told defaults DONT EVER get removed. The best they can do is mark the listing as paid (if it’s been paid).

This may be both unfair for the consumer and is generally insufficient to ensure credit is obtained with some lenders.

Alternatively, a professional credit repairer works with creditors to negotiate on the consumer’s behalf and work for the best outcome based on the creditor’s compliancy with the current legislation. They will also look at any other extenuating circumstances to determine if there is an avenue that can be investigated which results in having the listing removed.

Contact us for more information at www.mycra.com.au or tollfree on 1300 667 218 for consultation with a professional credit repairer.