Types of credit & debit issues

Types of credit and debt problems

The main types of credit and debt matters our clients present with are:

• credit problems with financial institutions (for example, loan and credit card problems);
• utilities and telecommunications debts;
• insurance debts;
• judgment debts; and
• mortgage arrears.

Debts to Centrelink and the Office of Housing are also common amongst our client group.  For information on housing debts, go to the Housing and Tenancy section. If your client presents with a social security debt, further information and referrals can be made to Social Security Rights Victoria.

The ACL applies, in whole or in part, to the following contracts (in a consumer context):

• supply of goods or services (including vehicles, gas, water, electricity, mobile phones, internet and other telecommunications);
• sale or grant of interests in land; and
• supply of financial products (including mortgages, credit cards and loans) or services (via the amended ASIC Act).

The great majority of contracts our clients experience problems with will be covered by the ACL.

The National Credit Act and Code provide an additional level of protection for consumer credit contracts.

Is it a consumer transaction?

The ACL applies to “consumers”.  “Consumer” is defined in section 3 of the ACL as a person who acquires goods and services for $40,000 or less (unless that amount is increased by regulation), or for personal, household or domestic purposes (i.e. even if the goods or services are worth more than $40,000, if the goods or services are of a kind ordinarily acquired for personal, domestic or household use or consumption (for example, a car), the person will still be a “consumer”).

The ACL adds that a person is a consumer if they purchase “a vehicle or trailer acquired for use principally in the transport of goods on public roads”.

A person will not be a consumer where they have acquired goods for the purposes of re-supply (for example, a store owner purchasing goods to sell), or to use or transform them in a process of production, manufacture or repair.

Is it consumer credit?

Under section 5 of the Code, the Code will apply to the provision of credit if, at the time the credit contract is entered into (or, in the case of precontractual obligations, at the time the contract is proposed to be entered into):

• the debtor is a natural person;
• the credit is provided or intended to be provided wholly or predominantly:
  • for personal, domestic or household purposes;
  • to purchase, renovate or improve residential property for investment purposes (only where the contract was entered into on or after 1 July 2010);
  • to refinance credit that has been provided wholly or predominantly to purchase, renovate or improve residential property for investment purposes (only where the contract was entered into on or after 1 July 2010);
• a charge is or may be made for providing the credit (for example, interest or fees);* and
• the credit provider provides the credit in the course of a business of providing credit.

For the purposes of the Code, the “predominant purpose” for which credit is provided is:

• the purpose for which more than half of the credit is intended to be used; or
• if the credit is intended to be used to obtain goods or services that will be used for different purposes, the purpose that the goods or services are intended to be used for the most (for example, a car that is mostly used as a family car, but used for a courier service one day per week).

Examples of loans that the Code will apply to include:

• car loans;
• personal loans;
• home loans;
• consumer leases (for example, car leases and rental contracts for goods); and
• credit cards.

The Code does not apply to:

• short term loans under 62 days, except where the fees and charges exceed 5% of the amount of the loan or where the interest rate is greater than 24% per annum (section 6(1) of the Code);
• insurance premiums paid by instalments (section 6(8) of the Code);
• business loans or credit for investments;
• pawn broking loans i.e. the provision of credit on the security of pawned goods (although unjust transactions and unconscionable interest and charges provisions of the Code apply) (section 6(9) of the Code);
• bill facilities (section 6(7) of the Code); and
• consumer leases for a fixed period of four months or less or which are for an indefinite period (section 171 of the Code).

* Some companies will market themselves as providing “interest free finance” with the aim of avoiding the protections of the Code.  If a company argues this, you should look at the terms of the contract – what is the value of the good being financed and what is the amount being charged?  For example, if the car being financed is worth $3000 and the finance is for $15,000, you may be able to argue that interest is in fact being charged and that the Code therefore applies.  Use the “Red Book” to work out the real value of the car your client has purchased.  If a creditor avoids the Code, they will argue that they can:

• undertake repossessions without providing notice or waiting minimum periods;
• prevent consumers from applying to have their loan varied if they suffer hardship; and
• prepare contracts that do not disclose the additional amount the client is paying to use the credit.

Business purpose declarations

A business purpose declaration is a statement signed by the debtor that the loan is for a business purpose and, therefore, not subject to consumer credit protections.

Under the Code, a business purpose declaration can put a loan outside the protections of the Code (and creates a presumption that the credit is not regulated by the Code), but they do not have conclusive evidentiary value, and it is an offence to procure a false business purpose declaration (section 13 of the Code).

If your client has signed a business purpose declaration, you should ask about the circumstances they made it in – did the lender have reason to believe that the loan was for personal, household or domestic purposes or would they have known if they’d made reasonable enquiries?

By way of example, if your client approaches a lender and explains that he/she wants to borrow to refinance some personal debts and the lender insists that the client sign a business purpose declaration (most likely so that they can provide an unregulated, high interest loan), the lender has committed an offence under the Code, punishable by a fine of up to 100 penalty units ($18,000 as of 31 July 2015) or two years in jail, or both.

Importantly, the business purpose declaration will be ineffective, so the loan will be regulated under the Code.

Even if your client has not expressly told the lender what the purpose of the loan is, the business purpose declaration will be ineffective if the lender would have known (or had reason to believe) that the loan was for personal, domestic or household purposes if they had made reasonable inquiries about the purpose. Credit providers therefore need to make reasonable enquiries about the purpose of each proposed loan before the debtor signs a business purpose declaration.

A business purpose declaration is also required to be in the form prescribed by regulation 68 of the National Consumer Credit Protection Regulations 2010 (NCCP Regulations) and will be ineffective if it is not (section 13(5) of the Code). The business purpose declaration must contain a warning that the protection of the Code may be lost as a result of signing the declaration.

If your client has signed a business purpose declaration that you believe to be invalid, you should raise this in the course of negotiations with the creditor and assert that the protections under the Code continue to apply.  The onus will be on the creditor to establish that the Code does not apply.

You should consider contacting ASIC if you think an offence has been committed under the Code.