Enforcing and ending credit contacts, mortgages and guarantees

Contributed by SigourneyDrane and current to 27 July 2018

Enforcement of credit contracts, mortgages and guarantees

A credit provider cannot begin enforcement proceedings in relation to a credit contract or mortgage unless:

• the debtor is in default under the credit contract;
• the credit provider has given the debtor and any guarantor, a default notice which allows the debtor a period of at least 30 days from the date of the notice to remedy the default; and
• default has not been remedied within that period; and
• if the credit contract is for a reverse mortgage, the credit provider has spoken to the debtor, a practising lawyer representing the debtor or a person with power of attorney relating to the debtor's financial affairs by telephone or in person in that period to confirm that the debtor has received the default notice and also to inform the person of the consequences of failure to remedy the default (or has made reasonable efforts to do so).

A credit provider must not begin enforcement proceedings against a mortgagor to recover payment of money due or take possession of, sell, appoint a receiver or foreclose in relation to property subject to a mortgage, unless:

• the mortgagor is in default under the mortgage; and
• the credit provider has given the mortgagor a default notice, complying with this section, allowing the mortgagor a period of at least 30 days from the date of the notice to remedy the default; and
• the default has not been remedied within that period.

If the mortgage secures an obligation under a credit contract for a reverse mortgage, the credit provider has spoken the mortgagor, a practising lawyer representing the mortgagor or a person with power of attorney relating to the mortgagor's financial affairs by telephone or in person in that period to confirm that the mortgagor has received the default notice and also to inform the person of the consequences of failure to remedy the default (or has made reasonable efforts to do so).

A default notice must contain a prominent heading at its top stating that it is a default notice and specify (see section 88 of the NCC):

• the default; and
• the action necessary to remedy the default; and
• a period for remedying the default; and
• the date after which enforcement proceedings in relation to the default, and, if relevant, repossession of mortgaged property may begin if the default has not been remedied; and
• that repossession and sale of mortgaged property may not extinguish the debtor's liability; and
• the information prescribed by the Regulations about the debtor's right to:
  • give a hardship notice; or
  • give a postponement request; or
  • make an application to the court under sections 74 and 96 of the NCC; and
  • the information prescribed by the Regulations about:
• the Australian Financial Complaints Authority (AFCA) scheme; and
• the debtor's rights under that scheme; and
• that a subsequent default of the same kind that occurs during the period specified for remedying the original default may be the subject of enforcement proceedings without further notice if it is not remedied within the period; and
• that, under the Privacy Act 1988 (Cth), a credit reporting body may collect and hold default information in relation to the default; and
• any other information prescribed by the Regulations.

If a default notice states that the credit provider intends to take action because the debtor or mortgagor is in default under the credit contract or mortgage, the debtor, mortgagor or guarantor may remedy the default within the period specified in the notice, and the contract or mortgage is then reinstated and any acceleration clause cannot operate (see section 89 of the NCC).

A debtor, mortgagor or guarantor does not remedy the default if, at the end of the period specified in the default notice, the debtor or mortgagor is in default under the credit contract or mortgage because of the breach specified in the default notice or because of a subsequent breach of the same type (see section 89 of the NCC).

A credit provider must not, under a guarantee, enforce a judgment against a guarantor unless (see section 90 of the NCC):

• the credit provider has obtained a judgment against the debtor for payment of the guaranteed liability and the judgment remains unsatisfied for 30 days after the credit provider has made a written demand for payment of the judgment debt; or
• the court has relieved the credit provider from the obligation to obtain a judgment against the debtor on the grounds that recovery from the debtor is unlikely; or
• the credit provider has made reasonable attempts to locate the debtor but without success; or
• the debtor is insolvent.

A credit provider must not, without the consent of the court, take possession of mortgaged goods if the amount currently owing under the credit contract related to the relevant mortgage is less than 25% of the amount of credit provided under the contract or $10,000, whichever is the lesser (see section 91 of the NCC).

Enforcement expenses

A credit provider must not recover or seek to recover enforcement expenses from a debtor, mortgagor or guarantor in excess of those reasonably incurred by the credit provider.
Enforcement expenses of a credit provider extend to those reasonably incurred by the use of the staff and facilities of the credit provider (see section 107 of the NCC).

Paying out a contract

A debtor or guarantor is entitled to pay out a credit contract at any time (see section 82 of the NCC).

The amount required to pay out a credit contract is the total of the following amounts:

• the amount of credit;
• the interest charges and all other fees and charges payable by the debtor to the credit provider up to the date of termination;
• reasonable enforcement expenses; and
• early termination charges, if provided for in the credit contract, less any payments made under the credit contract and any rebate of premium under section 148.

A credit provider must, at the written request of a debtor or guarantor, provide a written statement of the amount required to pay out a credit contract (other than a continuing credit contract) as at such date the debtor or guarantor specifies. If so requested, the credit provider must also provide details of the items which make up that amount (see section 83 of the NCC).

The statement must also contain a statement to the effect that the amount required to pay out the credit contract may change according to the date on which it is paid.

Surrender of mortgaged goods and goods subject to sale by instalment

If:

• a credit contract takes the form of a 'sale of goods by instalments' and ownership of the goods does not pass until all instalments are paid; or
• the credit provider has a mortgage over goods of the debtor or guarantor;

the debtor or mortgagor may give written notice of their intention to surrender the goods to the credit provider or, if the goods are in the credit provider's possession, require the credit provider in writing to sell the goods (see section 85 of the NCC).

The debtor or mortgagor may return the goods to the credit provider at the credit provider's place of business during ordinary business hours within seven days of the date of the notice, or at some other agreed time or place.

Within 14 days after the goods have been returned, the credit provider must give the debtor or mortgagor a written notice containing the estimated value of the goods and any other information required by the Regulations.

Within 21 days after the notice is given, the debtor can make a written request for return of the goods or withdraw the requirement to sell the goods. If this written request is made and the debtor or mortgagor is not in default then the credit provider must return the goods.

Alternatively, within the same 21 day period, the debtor or mortgagor may nominate in writing a person who is prepared to purchase the goods from the credit provider at the estimated value or any greater amount for which the credit provider has obtained a written offer to buy the goods.

If the goods are not required to be returned by the debtor or mortgagor, or if no buyer is nominated, the goods must be sold for the best price reasonably obtainable. The proceeds of the sale must then be credited to the debtor or mortgagor, less any sale amounts. On the sale of the goods, the amount required to pay out the contract becomes due.

The credit provider must give the debtor or mortgagor a written notice stating the gross amount realised on the sale, the net proceeds of the sale, the amount credited to the debtor or mortgagor and the amount required to pay out the credit contract or the amount due under the guarantee.