Financial hardship is a term used in Australia to refer to a temporary modification of loan contract conditions to assist those experiencing financial problems.
The modifications may include; a suspension of payments, the suspension of interest, or a reduction in payment amounts.
While not set in stone, it's customary for the agreements to be established for 3 months.
Financial Hardship is particularly useful for those experiencing short term financial problems (unemployment, illness, natural disaster).
For permanent modification of loan conditions a Debt Agreement provides the only way to do this.
Financial Hardship was previously a state based requirement on lenders but the introduction of the National Consumer Credit Protection Act (NCCP) in 2010 made assisting financially struggling customers a requirement of providing loans in Australia.
The NCCP lays out specific requirements that lenders have to offer consumers.
Under the NCCP there is an upper limit for hardship.
As of 1 July 2011 the figure is $500,000.
For consumers who owe more than this amount hardship is not mandated under the legislation, it is not to say however that the lender may not offer you financial hardship just that it's at their discretion.
Consumers apply for hardship by contacting their lender.
They may specifically have to ask for the hardship department.
The consumer needs to advise the lender that their circumstances have changed and that they cannot make the repayment as they are contractually obliged.
The consumer should be as honest as possible to ensure that lender all the information required to make a hardship decision.
Once an agreement is reached the consumer should request that the agreement be confirmed in writing.
The lender does not have to approve your application instantly.
Under the legislation they have 21 days to reply to your application however if they do reject your application they must provide a justification.
Rejected applications are able to be appealed through an external dispute resolution scheme, either the Financial Ombudsman Service or the Credit Ombudsman Service.
For the consumer the main benefit of financial hardship is that it provides a period of time where they can manage finance problems without getting a default which would prevent them from borrowing for 5 years.
For the lender the benefit is that they get to know about client's financial difficulties and assist them in managing the problem with a negotiated agreement rather than finding out there was a problem after the borrow missed 3 months of payments.