Introduction to Home Repossessions and Joint Debt

1. Introduction to Home Repossessions and Joint Debt Consumer Action Law Centre Worker advice line: 9602 3326 Rural access: 1300 881 020advice@consumeraction.org.au www.consumeraction.org.au

2. Consumer Action Law Centre • We are funded to provide telephone advice and services to financial counsellors • What we can help you with: • Consumer credit – disputes with banks, lenders, brokers, lessors and mortgage managers • Debt enforcement – debtor harassment, obtaining docs from debt collectors, the debt enforcement process and bankruptcy • Fair trading disputes (motor vehicle disputes, misleading, deceptive and unconscionable conduct)

3. Overview of presentation • Mortgagee’s power of sale • The process of foreclosure • Notice requirements • Court action • Sheriff • Mortgagee sale • Client options: • Fix default • Apply for hardship • Sell property/ refinance • Negotiate postponement • Defend court action • Stay of possession • Joint debts • Debt enforcement and co-owned property

4. Process of foreclosure

5. The process of foreclosure Mortgagee’s power of sale • The lender has the right to seize and sell mortgaged property once: • the borrower is in default under the mortgage (usually they failed to pay an instalment); • the borrower has not fixed the default within the time specified in the mortgage (or if no time is specified, within 30 days); • the lender has served the borrower with a written notice requiring them to fix the default; • the borrower has not fixed the default within the time period specified in the notice.

6. The process of foreclosure Notice requirements – section 88 • For loans and mortgages regulated by the National Credit Code (“NCC”), the lender must send the borrower a default notice giving them at least 30 days to fix the default beforeit begins enforcement action (s 88 NCC). • What loans/ mortgages are regulated by the NCC? • Generally: • where the credit was provided for personal, domestic or household purposes (or for loans/ mortgages entered into on or after1 July 2010 to invest in residential property); • where the borrower is a natural person (i.e. not a company) or a strata corporation; • the lender charges for a fee for providing the credit; and • the lender provided the credit in the course of conducting its business.

7. The process of foreclosure Notice requirements – section 88 (cont.) • A section 88 notice must specify: • the default; • the action necessary to fix the default • that if a further default of the same kind occurs during the period of the 30 day notice, the lender may bring enforcement action without further notice, unless that further default is also remedied within the same period.

8. The process of foreclosure Notice requirements – section 88 (cont.) • However, the lender does not have to give a section 88 notice if: • the lender believes on reasonable grounds that it was induced by fraud to enter into the credit contract or mortgage; • the lender has made reasonable attempts to locate the borrower/ mortgagor without success; • the lender believes on reasonable grounds that urgent action is necessary to protect the mortgaged property; or • the court says it doesn’t have to.

9. The process of foreclosure Notice requirements – section 88 (cont.) The NCC provides that if a lender begins enforcement action without giving the borrower a section 88 notice, it has committed a criminal offence.  However, based on recent court decisions, it appears that failure to give the notice will not be enough (on its own) to invalidate the enforcement action.

10. The process of foreclosure Notice requirements – TLA • The Transfer of Land Act 1958 (Vic) requires a lender to send a Notice to Pay to the borrower before the lender can take any action to sell the land. • The lender can send the Notice to Pay one month (or less, if the mortgage allows it) after the borrower has remained in breach of the mortgage. • The lender can sell the land, or can bring court action for possession of the land, one month (or whatever the notice period is under the mortgage) after it sends the Notice to Pay.  • The lender does not have to give any further warning or notice to the borrower.

11. The process of foreclosure Court action • For a mortgage contract, if the lender has served notices correctly, it is legally entitled to enter onto the premises and change the locks, and if necessary, to physically remove any occupants. • However, lenders generally do not do this unless the land is vacant. • Instead, lenders will usually take court proceedings so a sheriff, who is a court official, takes the action to enter the premises and evict occupants.

12. The process of foreclosure Court action (cont.) • The lender will file a writ in the Supreme or County Court seeking possession of the land. • In Victoria, the borrower has 10 days from being served with this writ in which to file a ‘notice of appearance’ and then a further 30 days to file a defence. • If the borrower fails to file an ‘appearance’ or a defence, or if the lender successfully challenges the defence, the Court will make an order giving the lender the right to take possession of the land.

13. The process of foreclosure Court action (cont.) • Even if the lender issues court proceedings, a borrower may still be able to complain to the Financial Ombudsman Service (“FOS”) or the Credit Ombudsman Service (“COSL”). • With some limited exceptions, complaining to FOS or COSL will stop the court action and keep it on hold for as long as FOS or COSL investigates the complaint. • To avoid judgment (which will limit what FOS/ COSL can do), the complaint should be made as soon as possible. • The borrower should urgently seek legal advice.

14. The process of foreclosure Repossession • Thepractice of the Sheriff’s Office is to give the borrower a ‘Notice to Vacate’. • The Notice to Vacate will include the date by which the borrower is required to vacate the property.  This is usually a Friday 3 weeks from the date of the letter. • The day before repossession is to take place, the Sheriff’s Office will telephone all parties to confirm that possession is to go ahead.

15. The process of foreclosure Mortgagee sale • The lender may sell either by auction or by private sale.  Three rules apply: • The lender must exercise the power of sale in good faith having regard to its own interest but not disregarding the interests of the borrower. • As part of this duty, the lender is bound to obtain the best price obtainable consistent with the right of the lender to realise the security. • The lender is entitled to realise its security by selling the mortgaged property as and when it chooses.

16. The process of foreclosure Mortgagee sale (cont.) • The proceeds of the sale of the security property will generally be disbursed as follows: • To the lender: the amount currently secured by the mortgage. • To the lender: the lender’s reasonable enforcement expenses (including fees to real estate agent). • To the borrower: the remaining proceeds of the sale.

17. The process of foreclosure Mortgagee sale (cont.) • If the amount due to the lender exceeds the proceeds of sale, the borrower will remain indebted to the lender for the difference. • In these circumstances, the lender can use a range of enforcement methods to recover the debt, including: • warrant of possession (for other property); • attachment of earnings order; • instalment order; • bankruptcy.

18. Client’s options

19. Client’s options Fix the default • The borrower can fix the default by paying the money (arrears) due within the time period fixed by the mortgage.  • The borrower can also fix the default by paying the total amount due under the mortgage at any time before the land is sold. • Where the borrower has fixed the default, and the lender continues to go ahead with the sale, the borrower may be able to apply to the court for an injunction to stop the sale.

20. Client’s options Fix the default (cont.) Consider: • Is the borrower eligible for money e.g. income protection insurance, a benefit if a partner has died etc. • Is the borrower due to receive money e.g. payment under a work contract, employment entitlements, the proceeds of sale of another asset, family law settlement, an inheritance? • Can the borrower apply for an early release of superannuation benefits? • Caution: also consider implications for taxation, eligibility for social security etc.

21. Client options Hardship Under the NCC, a consumer can seek a variation to their contract if: • the amount of credit provided was under: • $500,000 for contracts entered into after 1 July 2010; • for earlier contracts, the relevant threshold amount – see: www.moneysmart.gov.au); • due to illness, unemployment or other reasonable cause they cannot meet their obligations under the contract; and • they reasonably expect to be able to meet their obligations if the contract is varied in one of three ways (s 76 NCC).

22. Client options Hardship (cont.) The three variation options under the NCC are: • the term of the contract is extended and the rental payments reduced; • postponing during a specified period the dates payments are due; • a combination of the above. However, it may be possible to negotiate an alternative variation

23. Client’s options Hardship (cont.) Step 1: Write a letter to the lender, specifying: • the cause (illness, unemployment or other reasonable cause) of the financial hardship; and • the grounds on which the borrower believes they will be able to comply with the terms of the contract if it is changed.

24. Client options Hardship (cont.) Step 2: Complain to EDR: • immediately if it is urgent (e.g. if legal action or repossession is threatened) • immediately ifthe lender rejects the request • after 21 days if the lender does not provide a response in writing

25. Client options Hardship (cont.) Step 2 (Alternative): Apply to a court for an order that the contract be varied, but only if: • the consumer has written to the lender seeking the variation; and • the lender has rejected the request (s 74 National Consumer Credit Protection Act 2009)

26. Client options Hardship (cont.) A borrower may also have a right to hardship assistance under: • Cl 25.2 of the Banking Code of Practice • Cl 13 of the MIAA Code of Practice • These codes: • may apply to loans not covered by the NCC (e.g. where credit is for business or investment); • apply regardless of the amount of credit provided; • allow for different variation types (i.e. beyond the three types available under the NCC).

27. Client’s options Hardship (cont.) On 1 March 2013, changes to the hardship provisions of the NCC will take effect. Under the changes: • borrowers can apply for a variation verbally or in writing; • it is enough that the borrower “considers he/ she is or will be unable to meet his /her obligations under a credit contract” i.e. they don’t need to provide reasons; • within 21 days of the application, the lender can ask for information relevant to deciding whether and how to change the contract to address the hardship (and the borrower must provide the information within 21 days); • lenders will have to follow certain processes and keep to certain time limits; and • a lender will be unable to begin enforcement action until after it has responded properly to an application.

28. Client’s options Hardship (cont.) Case study #1 - Ali Ali is $6,000 in arrears on his home loan. His lender gave him reduced repayments for 3 months but is now saying that it will not assist him further. Having stuck his head in the sand because he found it all too stressful, he has now been served with a Court Writ for possession. The original amount borrowed in 2009 was $350,000. Following his father’s death, he has an inheritance worth $20,000 coming to him in approx 1.5 months • What questions would we need to ask Ali? • How can we assist Ali?

29. Client’s options Sale of property The borrower can seek the lender’s consent to sell the mortgaged property. This may have a number of advantages for the borrower, including that: • the borrower may be able to remain in the property until settlement; • the borrower will have some control over the sale process (including selecting agent, ensuring property is well presented etc.); • the borrower may avoid incurring additional enforcement expenses.

30. Client’s options Sale of property (cont.) The lender may be more likely to consent to the borrower selling the property if: • the borrower has signed an exclusive auction authority agreement with a reputable local real estate agent; • an auction date has been fixed.

31. Client’s options Postpone enforcement Under the NCC, a borrower can ask to negotiate a postponement of enforcement action if: • the amount of credit provided was under: • $500,000 for contracts entered into after 1 July 2010; • for earlier contracts, the relevant threshold amount – see: www.moneysmart.gov.au); • the lender has given a section 88 notice to the borrower; and • the period given in the section 88 notice for fixing the default has not yet expired (s 94 NCC).

32. Client’s options Postpone enforcement (cont.) • If a borrower requests to negotiate a postponement, the lender must provide a response within 21 days. • The response must be in writing and: • state whether or not the lender agrees to negotiate a postponement; • if the lender does not agree, state the lender’s reasons for not agreeing and the borrower’s rights to appeal to FOS or COSL (s 94 NCC).

33. Client’s options Postpone enforcement (cont.) • If the lender does not agree, the borrower can: • complain to FOS or COSL; or • apply to a court for an order that enforcement action be postponed (s 96 NCC). • If the lender does agree (and the borrower complies with the conditions of the postponement) the section 88 notice is taken not to have been given (s 95 NCC).

34. Client’s options Legal defences There are a numerous defences that may be available to the defendant when court proceedings are issued by the lender. It is critical that the person obtains legal advice as soon as possible after being served with court documents.

35. Client’s options Legal defences (cont.) Possible defences: • The borrower fixed the default during the period required by the section 88 notice. • The lender failed to consider the borrower’s application for a hardship variation (s 72 NCC). • The credit contract was varied on hardship grounds and the borrower complied with the terms of the contract as varied. • The lender agreed to postpone enforcement action and the borrower complied with the conditions of the postponement (s 95 NCC). • The relevant transaction (credit contract, mortgage or guarantee) was unjust (s 76 NCC).

36. Client’s options Stay of possession • If the creditor has obtained a court order to take possession of land, the borrower may be able to apply to the Supreme Court or the County Court for a stay on possession. • The discretion of the court to stay execution of judgement is a wide one. The court is required to take into account all the circumstances of the case. • Grounds to seek a stay include: • sale of the secured property is imminent; • refinance is imminent; • the debtor is to apply to set aside judgement and file a defence.

37. Client’s options Case study #2 - Jenny Jenny’s lender has obtained judgment against her in the Supreme Court. Now she has been served with a Notice to Vacate her property and must be out in two weeks. Having finally come to terms with the fact the property must be sold, she has found a local real estate agent she likes and has some simple ideas that will make the property more presentable. • What are Jenny’s options? • What will help her get what she wants?

38. Joint debts

39. Joint debts “Joint and several liability” • Definition:Where two or more people are individually liable in respect of the same liability. • In the case of a credit contract, all co-borrowers are responsible to perform all of the co-borrowers’ obligations under the credit contract and the lender can take enforcement action against any or all of the co-borrowers. • Under most credit contracts, the co-borrowers are jointly and severally liable.

40. Joint debts (cont.) “Joint and several liability” (cont.) • If one co-borrower is bankrupt, the non-bankrupt co-borrower, in almost all cases, continues to be liable for the whole of the debt. • If one co-borrower dies, the surviving non-bankrupt co-borrower, in almost all cases, continues to be liable for the whole of the debt. • However, the non-bankrupt or surviving co-borrower may be eligible for hardship assistance.

41. Joint debts What happens when co-borrowers separate? • All the co-borrowers remain individually liable under the credit contract, whether or not they remain in a relationship. (However, this may be altered by order of a court.) • This is true in relation to any shortfall that remains after sale of a security property. • A court or EDR scheme can reopen a transaction to relieve a co-borrower from liability if it is satisfied the transaction is unjust (s 76 NCC). • A member of a separating couple who is a co-borrower should seek family law advice.

42. Debt enforcement and co-owned property

43. Debt enforcement and co-owned property You will recall: An unsecured creditor who obtains judgment can use a range of enforcement methods to recover the judgment debt, including: • warrant of possession; • attachment of earnings order; • instalment order; • bankruptcy.

44. Debt enforcement and co-owned property You will also recall: • In bankruptcy, property that can be taken by the trustee is called “divisible property”. • Houses, land and motor vehicles worth over $7,200 (indexed) are all divisible property. • Property that cannot be taken by the trustee is called “non-divisible property”. • Ordinary household goods, tools of trade worth less than $3,550 (indexed), vehicles worth less than $7,200 and superannuation are all non-divisible property. See: s 116(1) Bankruptcy Act; r 6.03 Bankruptcy Regulations)

45. Debt enforcement and co-owned property When a co-owner of divisible property is bankrupt • The trustee can register as joint owner with the non-bankrupt co-owner. • The non-bankrupt co-owner is often given an opportunity to purchase the trustee’s interest in the property. • If they can’t afford to do this, the non-bankrupt co-owner might join with the trustee in the sale of the house.

46. Debt enforcement and co-owned property When a co-owner of divisible property is bankrupt (cont.) • The non-bankrupt co-owner will then usually receive equal shares of any money left over after all mortgages and expenses. • If the non-bankrupt co-owner refuses to cooperate, the trustee can apply to the court to obtain an order of sale and sell the house without consent.

47. Debt enforcement and co-owned property When a co-owner of divisible property is bankrupt (cont.) • More complex situations arise where: • the bankrupt co-owner has used some of the equity in the property solely for their own benefit (e.g. for securing a loan) • the non-bankrupt co-owner contributed more than 50% of the purchase price or mortgage repayments; • one or both co-owners are involved in family court proceedings. • In these circumstances: seek legal advice.

48. Seeking legal advice

49. Seeking advice Whether or not you think your client has a legal remedy, seek legal advice from Consumer Action Law Centre if: • your client has an asset at risk; • your client’s involvement in a loan or mortgage seems unfair; • your client is being harassed by a debt collector; • if you just want to test your understanding or would like another point of view of your client’s rights.

50. Any questions? Consumer Action Law Centre Level 7, 459 Little Collins Street Melbourne VIC 3000 Worker Advice Line: (03) 9602 3326 Rural access: 1300 881 020 Email: advice@consumeraction.org.au