It may be a foreign concept to some people to turn to their bank when they are experiencing financial difficulty, but asking for help from your bank could be the most savvy thing you can do for your finances, and ultimately your credit file if you are in trouble. New financial hardship laws which came into effect in March 2013 have been embraced by banks, and the Australian Bankers’ Association (ABA) has today announced a package which is designed to help make the process clearer for consumers who are experiencing temporary financial difficulty. We look at the package in detail, what it means for your credit file and your ability to obtain credit when you recover financially.

By Graham Doessel, Founder and CEO of MyCRA Credit Rating Repair and www.fixmybadcredit.com.au.

As a Cancer survivor, I know all too well what it’s like to be in a worrisome financial situation. When you have to take time out from your business or employment to recover your health, the bills can pile up. I remember trying to talk to my bank at the time about freezing my mortgage so I had one less worry. But that was a difficult thing to do – especially for someone whose small business used credit accounts. In my experience, my bank wasn’t eager to offer the hardship, and when they did, it was under terms too difficult for me to accept. So I borrowed my way out of trouble, and luckily – I recovered quickly and was able to get back on my feet again. But many people in the past have not been so lucky. They have run into real trouble, and banks may have been criticised for not being open with the existence of their hardship policies, or willing to vary credit terms unless the customer could jump through the right hoops to secure it.

But with new legislation Consumer Credit Legislation Amendment (Enhancements) Bill 2012 being passed this year, there have come new rights for those in temporary financial trouble. Now the banks are taking a proactive stance on encouraging open communication and variations to the original credit contract of those consumers ‘doing it tough.’

The ABA and banks in consultation with consumer and community groups have developed a package of initiatives that are proposing to promote good practice, clearer hardship processes and provide useful information to support their customers in dire financial circumstances.

This is reportedly in response to concerns raised by stakeholders around a general lack of awareness about hardship assistance offered by banks.

Steven Münchenberg, Chief Executive of the ABA, says research shows only one out of four bank customers know that banks offer hardship assistance.

“If customers find themselves in financial difficulty, they need to take some action because money troubles don’t usually go away on their own. Don’t ignore the problem and talk to your bank as early as you can. Customers can also call an independent financial counsellor or ask your bank for a referral to an independent financial counsellor,” he said in a media statement.

The ABA estimates that over 135,000 customers have been provided with hardship assistance by the main retail banks over the past year.

Banks have reported that the number of customers who take advantage of financial hardship arrangements increases when economic conditions deteriorate. The key driver of hardship assistance is reduced income due to unemployment.

Banks have also reported that customers have benefited from temporary assistance following a natural disaster. However, assistance during these times does not have a significant impact on the overall number of customers who are provided with hardship assistance.

Mr Münchenberg also says illness, injury or a relationship breakdown can cause financial difficulties.

The ABA’s consumer factsheet on hardship variations (pdf) explains what some of the hardship assistance options could be:

Hardship arrangements cover the time between when your circumstances change and when you can start repaying your debts in full or varied as agreed.

In most cases, people just need some temporary help to get them through the tough times and arrangements of between three and six months are generally suitable.

The arrangements available will depend on your personal circumstances and financial situation. Somemeasures may include:

• deferring or reducing loan repayments

• restructuring and consolidating loans

• altering loan repayments to interest-only

• changing limits on lines of credit

• waiving penalties for early withdrawal of a term deposit

• freezing loans in exceptional circumstances, such as after an emergency event or natural disaster

• providing a moratorium on collections action • providing alternative banking arrangements.

When considering the type of assistance that might be appropriate, banks will assess the situation on a case-by-case basis and consider your specific circumstances, such as your overall financial position and whether assistance would genuinely be able to help you.

Banks also have to factor in business considerations, such as whether providing the assistance is consistent with their internal policies, commercial costs and management practices.

If your financial situation has permanently deteriorated and you can’t meet regular repayments over the long term even with your bank’s help, you might need to consider other options and make some difficult decisions.

While people rarely have to face this situation, if it occurs you may have to sell your property, refinance your business or consider bankruptcy or insolvency arrangements.

How will asking for a hardship variation impact my credit file?

We see the emphasis on hardship variations as a positive change for consumers to be able to talk to their bank and actively get help to improve their circumstances. One of the main differences between asking for and obtaining an official variation in your credit obligations compared with simply not paying your bills is that you avoid the bank placing a default listing on your credit file (provided you meet the new obligations that is). There is a big incentive to come to try to come to an arrangement with your bank prior to being in default (60 days in arrears) – as any arrangements made after that time will be recorded on your credit file as well as your default.

Secondly, there is also an incentive to put your hand up and ask for help in the early days – prior to being even one payment cycle behind in your repayments. Any time you fail to make a repayment with your bank on time, the late payment will be recorded on your credit file – so for example if you are unable to make this month’s mortgage repayment by the due date, that will be recorded on your credit file, along with the date you made the payment. Although lenders won’t see this data until March 2014, it is being recorded now.

Any person who makes an official hardship variation which is accepted by their bank will be spared from being recorded as in default, but may not be spared from the late payment notations which are incurred prior to the acceptance of the hardship variation. So the incentive really is there to get in as early as possible if you are experiencing temporary financial difficulty and speak with your bank to make new arrangements to suit you.

Where do I go from here?

You can get assistance through the ABA’s Doing It Tough website, or you can contact your bank or building society directly and ask to speak with the Financial Hardship Variation Team. Using the words ‘financial hardship’ will help make it clear to the people you speak with at the bank about what it is you need. Ideally, act before you fall into arrears on your account – to save your credit file when you recover from this difficult time.

For additional advice, visit ASIC’s Money Smart Website Trouble with Debts.

To check what is being seen by lenders about you, it is a good idea to get a copy of your credit file. This is free once every 12 months from Australia’s credit reporting agencies, and will be sent within 10 working days. If there is anything on your credit report which you are unsure about, or which seems inaccurate or inconsistent, you do have the right to have the information rectified. Contact MyCRA Credit Rating Repair for more information on disputing a credit listing or to obtain a free copy of your credit report 1300 667 218.

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