What you need to know about Financial Hardship and banks
Posted on 27 oct 2016
I had a client once who experienced financial hardship, his wife took him for everything he owned because she spotted him driving around Double Bay in a silver Porsche and a blonde half his age. She had no idea he owned a Porsche and certainly had no idea about the blonde. I wasn’t sure if she was more offended by his indiscretions or the old Holden station wagon he made her drive around in.
For those who are deeply in debt and, worse still, deeply in payment arrears, there is a common misconception of clients mismanaging their credit. Though we have all seen clients run up gambling debts, bought too many shoes or lent uncle Frank the credit card. There are those who are suffering from loss of business, unemployment & illness, normal debt level in context of self/fulltime employment turns into abnormal debt due to unemployment.
Financial hardship is when a person can no longer service their creditors and pay their household bills at the same time. The cracks begin to show when they consistently fall 30+ days in arrears, phone disconnections and maxing out credit limits.
They will experience debt collection activity that begins with letters, phone calls and, a new bank innovation, text collecting “Please urgently contact Vishnu Prasad on 1300….for a very important message.”
If left unresolved and ignored the collection activity may end with very serious legal recovery action.
Major life changes can trigger financial hardship but the news is not all bad for our customers.
Most financial institutions will have hardship policies and procedures in place. Some have taken the next step by setting up dedicated hardship departments who specialise in assisting customers. Past experience has shown that hardship cases may be clumsily handled by normal collection departments and special circumstances require special skills from bank staff.
Customers applying for hardship will at times face hurdles, navigating through their telephone systems and long phone queues to begin with. Because people can be intimidated by the gruffness of the whole collections experience sometimes customers do not/can not explain their situation well enough to get the message across. Also key information can often be overlooked by staff and the application for assistance could be rejected.
Accordingly it is far better for your client to have professional representation.
To their credit, the big banks and smaller independent debt collection agencies do their best on a policy level to assist their customers as best they ‘bankably’ can, but sometimes there is mixed results in customer satisfaction.
Something else your customer should know: Banks are legally required to assess applications for hardship when requested however they are not legally obliged to offer the benefits of hardship if they feel the customer is not experiencing financial difficulty.
Hardship application pro’s:
1. The banks may reduce or nullify your interest rate for a prescribe term, i.e. 3 months
2. Lowered payment arrangement for the same term
3. Short term avoidance of ongoing collection activity
4. Customer has time to trade their way through their problems
Hardship application cons:
1. Short term solution only
2. Increase likelihood of a Veda credit rating default
3. Hardship offers can just as easily be pulled from the customer, exposing them to sudden and possible vigorous collection activity4. Hardship applications is a false economy, once taken off the hardship program they face extensive arrears which then must be brought up to date
When experiencing long term financial trouble customers are in danger of falling into a hardship merry-go-round, without a viable exit strategy they cannot generally rely on the banks good graces for ever.
If your customers financial troubles are temporary, loss of employment for example, then a Hardship application is a good option. However if their circumstances are considered long term, 6 months and beyond, then customers should be considering other options:
1. Refinancing to consolidate debts
2. Change of lifestyle, residence etc to better fit their budget
3. Seek the service of a Debt Negotiator
Before considering any option from this article or from other specialists it’s important to seek professional advice to ensure you are making the correct decision for yourself.