Anyone can experience financial hardships, often through unexpected events like illness, sudden death, divorce, and more. While it is always important to prioritise making payments for loans and credit cards on time, it is not always possible. No matter your situation, you do have remedial actions you can take.
What happens if I cannot repay my debt?
Within the first 30 days, you will receive a notice from your bank for your missed payment with a specified amount of time to make the payment.
Sixty days after a missed payment, your account falls into default. The bank will issue an S80 Default notice and formally notify you that you are in breach of your loan or credit contract. At this point, you have another 30 days to pay your arrears.
At the end of this period, if you have still not paid, a formal default will be put on your credit history. These notices are serious and stay on your credit history for five years. You will likely find it hard to get approved for new personal loans, mortgage or credit cards until the default has been removed from your credit history.
You are now between 90 and 120 days out from your first missed payment. At this point, you will be sent a Letter of Demand, which will seek full payment of any arrears. Creditors will contact you looking to collect what they are owed. You are under no legal obligation to meet with them face-to-face, but can talk to them over the phone or by email.
It is also at this point that any collateral you have against your debt like a car or house is in danger of repossession.
If you do not respond to the Letter of Demand, the situation can be escalated and brought to the courts. You will receive a Statement of Claim. If you do not respond or the court finds that your debt is valid, there will be a Judgment entered against you for the full amount, plus interest and attorneys’ fees. This Judgment will also be marked on your credit history.
If you ignore the Statement of Claim, the court can declare you bankrupt.
What is a guarantee?
A guarantee is when the bank asks another party to ‘guarantee’ a loan for another individual or a business. This person, deemed the guarantor, is the person the bank will pursue for remuneration if the loan goes into default. Unfortunately, while many guarantors believe that banks can only call on a guarantor once all other remedies have been exhausted, banks can actually call on a guarantee the moment a loan goes into default.
With a personal guarantee, the guarantor’s personal home and assets can be seized to pay the outstanding debt.
What to do if you missed a payment
Even people with sparkling credit histories will sometimes fall on hard times due to illness, job loss, or divorce that can make it difficult to continue to meet monthly payments. If you know you are in danger of missing a payment for a loan or you have received a Default notice, you have a range of actions you can take including:
- Paying your arrears
- Contact your bank and negotiate a repayment schedule
- Apply for a hardship variation, a formal process asking your bank to extend your loan period, postpone your payments for a specified amount of time, or do both.
- Refinance your home loan(s) or consolidate your personal loans.
- Sell personal property to pay your arrears.
- Voluntarily return collateral to the bank.
The key is to be active in this process. If you are at risk of defaulting on more than one loan, prioritise loans with collateral such as a mortgage or car loan, over unsecured debt like credit cards.
Should I refinance my loans?
Refinancing can ease worry over making more than one monthly payment a month and can be a good choice for those that will be paying less in interest and fees. However, refinancing can be a risk that costs more over the long-term as you might take longer to pay off your debts and accrue more interest in the process. Refinancing might also give you access to more credit, which can exacerbate the problem. For instance, if you refinance your credit card debt into one personal loan, it might be tempting to begin using your credit cards again.
Don’t wait. Act now.
If you are struggling to meet your financial obligations, the best thing you can to do is to act as soon as possible. The immediate and long-term effects of a defaulted loan are not worth it. No matter what position you are in, you do have actions you can take. Remember, your bank wants to be paid and will often work with you to create a payment schedule that you can reach during this difficult time.