Debt collection and social security recipients

» Introduction

» Relevant legislative provisions and Codes

» How we apply these provisions to disputes lodged with us

» Dealing with disputes to vary a credit contract as a result of financial difficulty

Under the earlier Terms of Reference for the Banking & Financial Services Ombudsman, and for the FOS’ Banking and Finance group under its transitional Terms of Reference, we could consider a financial services provider’s (FSP’s) response to a debtor’s request for assistance in financial difficulty, but could not review the FSP’s commercial decision.

Our current Terms of Reference now enable us to review an FSP’s credit assessment of a debtor’s proposal for variation in relation to a contract governed by the UCCC or similar legislation (such as the NCC).

Clause 5.1(c)(ii) of the Terms of Reference provide that we may consider a dispute about an FSP’s assessment of the credit risk posed by a borrower or the security required for a loan when the dispute is about a variation of a credit contract where the Applicant is in financial difficulty. A credit contract is defined as a regulated contract under the UCCC or similar legislation.

The current Terms of Reference, which came into operation on 1 January 2010, are accompanied by Operational Guidelines which are designed to provide guidance to users about how we may handle and consider disputes. The Operational Guidelines dealing with financial hardship matters

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under clause 5.1(c)(ii) of Terms of Reference state (at page 23) that:

“FOS also assesses whether the FSP has met obligations under Commonwealth and state legislative protections designed to assist Centrelink recipients.”

Clause 9 of the Terms of Reference deals with the types of remedies which we may require an FSP to undertake to resolve a dispute. The Operational Guidelines dealing with the types of remedies state (at page 72) that:

“FOS also assesses whether Applicants may be assisted by Commonwealth and state legislative protections designed to assist Centrelink recipients.”

Following is further information on what the Commonwealth and state legislative provisions are and how we might take those provisions into account when dealing with a dispute, particularly disputes about financial difficulty in relation to a credit contract.

Social Security Administration Act 1991 (Cth)

Section 60(1) of the Social Security Administration Act 1991 (Cth) (“the Commonwealth Act”) provides that:

“A social security payment is absolutely inalienable, whether by way of, or in consequence of, sale, assignment, charge, execution, bankruptcy or otherwise.”

Section 60(2) of the Commonwealth Act provides for a number of exceptions which apply to the collection of certain Commonwealth debts and therefore are not relevant to any consideration of a debt owing to an FSP by a Centrelink recipient.

State Debt Recovery legislation

Section 12 of the Judgment Debt Recovery Act 1984 (Vic) (“the Victorian Act”) provides as follows:

1. An instalment order shall not without the consent of the judgment debtor be made if the income of the judgment debtor is derived solely from a pension benefit allowance or other regular payment under the Commonwealth Social Security Act 1947 or section 24 of the Children, Youth and Families Act 2005.
2. In subsection (1) the Commonwealth Social Security Act 1947 means the Commonwealth Act known as the Social Security Act 1947 as amended and in force for the time being and, if the provisions of that Act are re-enacted, means those provisions as re-enacted and as subsequently amended and in force for the time being.

The Victorian Act applies to any instalment order in respect of a judgment or order for the recovery of money made or given by a Victorian court in an action.

Legislation in other states and territories is not so specific about the source of a judgment debtor’s income when a court is assessing an application for an instalment order. However, most comparable legislation does require the court to take into consideration the debtor’s means of satisfying the judgment, his or her necessary living expenses and other liabilities.

Uniform Consumer Credit Code and the National Consumer Code

In considering an application for the variation of a credit contract regulated by the UCCC, we will take into account the general principle expressed in Section 66(1) of the UCCC (and from 1 July 2010, Section 72(1) of the NCC):

“A debtor who is unable reasonably, because of illness, unemployment or other reasonable cause, to meet the debtor's obligations under a credit contract and who reasonably expects to be able to discharge the debtor's obligations if the terms of the contract were changed in a manner set out in subsection (2) may apply to the credit provider for such a change.”

Consumer protection legislation

Another relevant legislative provision is Section 12CB of the Australian Securities and Investments Commission Act 2001 (ASIC Act) which prohibits a person, in trade or commerce, in connection with the supply or possible supply of financial services from engaging in conduct that is, in all the circumstances, unconscionable. In considering whether conduct of a financial services provider is unconscionable, regard may be had to, among other matters: 

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• the relative bargaining strengths of the financial services provider and the consumer, and
• whether any undue influence or pressure was exerted on the consumer by the FSP or a person acting on its behalf.

It should be noted, however, that s 12CB(3) of the ASIC Act provides that a person does not engage in unconscionable conduct merely because the person issues legal proceedings.

Codes of Conduct

Our current Terms of Reference require us, when considering a dispute, to have regard to industry codes and good industry practice as well as legal principles. It is therefore also relevant when considering a dispute about an FSP’s actions to have regard to the ASIC/ACCC debt collection guidelines and the Centrelink Code of Operations.

The ASIC/ACCC debt collection guidelines provide that debtors are legally responsible for paying debts they legitimately owe and they should not deliberately try to avoid their obligations. On the other hand, a collector must not threaten action (legal or otherwise) that they are not legally permitted to take.

In this regard, Guideline 19 provides that:

“(b) You [the creditor] are entitled to accurately explain the consequences of non-payment of a debt, but must not misrepresent those consequences.
…

(e) Do not state or imply that:

• immediate possession will be taken of a debtor’s home or other property when the debt is not secured by that property, or the creditor has not obtained judgment for the debt
• unsecured goods may be seized and sold without further legal action
• unsecured basic household items can be seized if the debtor is made bankrupt
• additional fees or charges will be added to the debt if payment is not made, if such gees or charges are not permitted by law
• additional fees or charges will be added to the debt where there is no contractual right to add these.
     ….”

Centrelink Code subscribers include banks, credit unions and building societies, the large majority of which are also members of the Financial Ombudsman Service.

Where the debt owed to the financial institution arises by way of an authorised overdraft, the Centrelink Code of Operations permits a financial institution to recover up to 10% of future payments to repay that debt. However, the Centrelink Code recognises:

“…. the subsistence nature of Centrelink payments and the need for recipients of income support payments to have access to a reasonable amount of money to live on. Participating financial institutions have agreed that they will take this into account when considering the actual amount they should recover each fortnight (the Code only specifies a minimum amount customers can retain, not a standard amount).”

The application of these provisions will arise in dealing with disputes lodged about an Applicant’s inability to repay a credit facility due to financial difficulty, both in reviewing the FSP’s collection activity prior to the dispute being lodged with our office, and in considering the potential of any variation to resolve the dispute.

The provisions of the Commonwealth and Victorian Acts seek to limit the ability of a creditor to recover a judgment debt from a debtor’s social security income. Neither section, in our view, prevents a creditor from taking action to recover a debt from a Social Security recipient, nor enforce any judgment against other income (if any) or from unprotected assets. Indeed, the Victorian Act allows for the fact that a debtor may consent to the making of an instalment order from their Commonwealth pension where that is their sole income.

The practical outcome for the credit provider may be that, where the debtor’s sole income is a Social Security benefit and there are no unprotected assets of value against which the judgment can be enforced, debt collection activity will be a

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hollow exercise from a creditor’s point of view. However, the creditor could obtain a judgment and seek to enforce it at a later date should the debtor’s income no longer be protected (for example, if the debtor returns to work).

A creditor would need to be careful in these circumstances to ensure that they do not mislead the debtor into believing they must make a payment from a Social Security benefit. Should a credit provider suggest to, or direct, a Social Security recipient to make a payment without also pointing out that there is no obligation to do so while their sole source of income is a Social Security benefit (and the debtor has no other assets), such conduct might be regarded as misleading and not in compliance with ASIC/ACCC Guidelines.

It is therefore our view that, provided the creditor does not engage in misleading or unconscionable conduct, or otherwise breach the ASIC/ACCC debt collection guidelines, there is no impediment to the creditor seeking to recover a debt from a Social Security recipient, including by issuing legal proceedings and obtaining judgment.

When we receive a dispute from an Applicant experiencing financial difficulty, we will seek information from them about their present financial position. Once that information has been provided, then the credit provider should make a decision about whether they are prepared to vary the loan as requested by the Applicant. If the parties are unable to agree, we will get the parties together on the telephone to see if an arrangement can be made.

If an Applicant’s sole income is a Centrelink benefit and they have no unprotected assets, and the Applicant does not wish to make any payment to the loan, we would not compel them to do so. However, we would decline a request for a variation to reduce the payments to nil while the Applicant remains on Centrelink benefits. This is because the Applicant could not reasonably expect to be able to discharge their obligations if the terms of the contract were changed in the manner requested. Similarly, we would not require the credit provider to write off the debt, although the credit provider may do so in exercising their commercial judgment about whether it is worth pursuing the debt.

Our usual approach to financial difficulty disputes is to

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arrange a conciliation conference at which the parties may discuss and reach agreement about an appropriate variation to the Applicant’s contract. However, if the only proposal that an Applicant can or wishes to make is that the debt be waived, then we can see little benefit in convening a conference. We would however refer the Applicant to a financial counsellor or consumer advisory service for assistance in dealing with their financial circumstances.

Having made a decision along those lines, our file would be closed and the credit provider would be able to commence or continue legal proceedings and possibly obtain judgment, which, having regard to the provisions of the Commonwealth and Victorian Acts outlined above, would be as far as they could go unless or until the Applicant’s financial circumstances improved.

Consumers should be aware, however, that the legislative provisions referred to above would not prevent a credit provider from making a listing on a credit file, or prevent a judgment from being noted on a credit file. Such listings may prevent the consumer from obtaining credit in the future.