Bad Debt and Consumer Credit
Bad debt is when you have borrowed money and do not make the required repayments or fail to repay the loan. Under the Australian consumer credit law, a lender is known as a credit provider and it can be a bank, credit union or other finance company.
When you borrow money for a non-business reason this is known as consumer credit. Consumer credit includes the following types of financial products:
- Credit cards;
- Mortgages and home loans;
- Renting household goods and consumer leases; and
- Personal loans, including pay-day loans.
When you do not repay your debt, the credit provider will then notify a credit reporting agency to tell them that you have not paid the money as agreed in your loan contract. The default amount will then be listed as a “bad debt” on your credit history. A debt recovery company may contact you to try and recover the debt and in some cases bring legal action.
How do you default on a loan?
When you borrow money from a credit provider you are entering into a legal contract to repay the money over an agreed period of time.
Loan contracts will contain terms and conditions that set out your obligations to the credit provider and the credit provider’s obligations to you.
Standard consumer credit contracts will contain the following terms:
- The names of the borrower and the credit provider;
- The amount of money being borrowed or the maximum credit limit;
- The interest rate and how it is calculated (this can be fixed or variable);
- The total amount of interest payable;
- The default interest rate;
- The length of the loan;
- The amount of repayments and the number of repayments to discharge the debt;
- The due dates of each payment or instalment; and
- Any fees and charges including any enforcement expenses in the event that there is a breach of the credit contract.
If you do not make the required payment by the due date the credit provider will send you a letter asking you to make the payment. This is called a default notice.
The borrower will have 30 days to remedy the breach which usually is to pay what is owing. If the payment is not made within this time the credit provider can begin enforcement proceedings. This can result in default interest being charged which is usually at a higher percentage rate.
What is a credit listing?
Veda Advantage is a national credit reporting agency that records and analyses individuals’ credit history. Veda collects and analyses data to create an individual credit report which records the following information:
- Credit applications and enquiries you have made in the last five years;
- The type of credit you have applied for;
- The amount of credit or credit limit applied for;
- Monthly repayment history; and
- Any debts that are overdue by 60 days or more, this is sometimes referred to as bad debt or bad credit.
Consumer credit information that is publicly available includes court judgments and writs, company director details and information about bankruptcy, debt agreements and personal insolvency. Veda uses all this credit information and produces a credit score for each individual. This is also known as a credit rating.
Credit scores range from 0-1200. The higher your score, the better your credit score or credit rating is for credit providers to lend you money. There are many factors that contribute to your credit score, loan defaults and bad debts will be likely factors to you having a low score and a bad credit rating.
Using Veda, you can access your own credit report for free. There are options to access more detailed credit reports including your credit score for a fee and these are delivered to you immediately. However, you can access one free credit report per year with a delivery time of up to 10 days. These are usually emailed.
What is the consumer credit legislation and how does it apply to bad debt?
The National Consumer Credit Code, which is found in Schedule 1 of the National Consumer Credit Protection Act 2009 (Cth) is the legislation which applies to all credit providers that lend to consumers. It also governs how bad debt is accrued by borrowers and what credit providers must do to ensure borrowers are given opportunities to apply for hardship.
Under the legislation, all credit providers must have an Australian Credit Licence which is regulated by Australian Securities Investment Commission (ASIC).
There are strict guidelines that credit providers must follow when lending money, this is known as responsible lending. The credit provider must not enter into a credit contract with a consumer if the contract will be unsuitable. This means that the provider has an obligation to carry out relevant enquiries and assessments to ensure the consumer can repay the loan.
The Code also sets out the rules and requirements that must be followed when a borrower defaults on a loan. The credit provider must give the borrower a notice in writing to remedy the default within 30 days, and notify the borrower of any hardship provisions and the external dispute resolution options available.
If a consumer takes up the opportunity to utilise a hardship provision, a credit provider cannot proceed with enforcement proceedings until the hardship has been assessed.
How do you remove a bad debt?
As with most things in life, a bad debt listing on your credit history is more easily avoided than removed. Financial counsellors can help you to get your finances in order to avoid having a default. If you have multiple debts and are struggling to meet your repayments, then debt consolidation may also be an option.
In some instances, debts may be statute barred. This means that the loan agreement entered into is no longer enforceable because of a change in the law. If this is the case, then the bad debt can be removed from your credit history.
You can also get your bad debt removed from your Veda credit file if you defaulted on the loan because of an unavoidable error. It may be from a natural disaster or bank error and you have since entered into a new arrangement with the credit provider.
Alternatively, if the credit provider had made a fundamental error in their notification requirements, a court may order the default to be removed from your credit file.