Monday, April 18, 2011

The Nuances of Default Notices

Often when consumers, who may be defaulting on their credit repayments, receive a default notice they do not realize the implications of it and what they must do about it. This article focuses on default notices and the possible legal ramifications if the default is fixed after the period specified on the default notice.

Default notice – Section 88 of the National Credit Code (NCC)

The credit provider must give the debtor a default notice under section 88 of the NCC before beginning enforcement proceedings. The credit provider must specify in the default notice how to fix the default. Under the NCC the credit provider must give the debtor at least 30 days from the date they are given the default notice to fix the default. It is important to pay attention to this 30-day or more period (we will call this the ‘specified period’).

When is the default notice ‘given’?

The default notice is taken to be given, if it is sent by post, on the date it bears or the date when it would have been delivered in the ordinary of course of post, whichever is the latter (s196 NCC). The amount of time the “ordinary course of post” refers to would depend on the locations of the sender and receiver. In the case of a notice that is served personally it will be taken to be given on the date it bears or the date it is received by the addressee, which ever is the later.

Can a default ever be remedied after the period specified on the default notice?

If the debtor pays the arrears and any amount that falls due within the specified
period, the default is fixed and the contract is reinstated. If the debtor does not pay the arrears and any other payments that fall due within the specified period, then they will remain in default and the credit provider may begin enforcement
proceedings or accelerate the contract (if the contract allows for this) and make all monies owed under the contract immediately due and payable.

What is less clear is whether the contract will remain in default if the debtor pays all outstanding amounts after the 30 day period. Often, a debtor ‘catches up’ with the repayment or repayments, but not within the specified period, only after. The credit provider may not have proceeded to enforce the credit contract and may have allowed the debtor to subsequently remedy the default and apparently reinstate the contract.

The NCC is ambiguous on whether ‘fixing’ a default after the specified period will remedy the default and reinstate the contract. There is very little case law or commentary that deals with this particular issue. The point is significant due to its possible ramifications.

Consider a situation where you were in default on a credit contract and were issued with a default notice. You did not fix the default within the specified period but fixed the default two weeks later. Two years later you were in default again. Common sense would order that the credit provider could not rely on the default notice issued two years ago but would need to issue a new one. However, the NCC is ambiguous on this point.

Section 89(2) of the NCC states;

“A debtor does not remedy the default if, at the end of the period, the debtor is in
default under the credit contract or mortgage because of the breach specified in the notice or because of a subsequent breach of the same type”
Does this section mean that the debtor can never technically fix the default after the specified period and the default notice remains ‘alive’ to any subsequent default?

Or will paying all amounts owing some time after the specified period fix the default and reinstate the contract? This is significant when you consider whether a credit provider needs to send a new default notice or can rely on an old one in a situation where a default was remedied after the specified period and the credit provider did not exercise their rights to enforce the contract or accelerate it.

Under section 88 of the NCC, a credit provider must not begin enforcement proceedings against a debtor unless the debtor is in default. Commonsense would dictate that if a debtor has cleared all arrears they are no longer in default and enforcement action could not be taken against them. However, this appears to be contradictory to section 89(2) of the NCC.

It is arguable that, if a credit provider took no enforcement action upon the expiry of the specified period and the default was subsequently fixed, any attempt to rely on that default notice for future breaches could attract the equitable defence of ‘laches’. Laches refers to an unreasonable delay in pursuing a right in a way that prejudices another party.

Mortgages and Defaults

If a mortgagor (debtor) defaults on a payment under a home loan and mortgage, the mortgagee (creditor) can give the debtor a default notice as described above. If the default is not remedied within the 30 days, the mortgagee can start legal proceedings. This may lead to the mortgagee obtaining judgment against the mortgagor. A judgment is the determination of a court in legal proceedings. A creditor seeking a judgment in repossession proceedings generally asks for

  • possession of the property, and/or
  • payment of the whole amount owing under the credit contract

Once the mortgagee obtains judgment, they are legally entitled to take action to enforce the judgment. The mortgagee will generally allow a period of time for the
mortgagor to vacate the property and will issue the mortgagor with a notice to  that effect.

Regardless of whether or not the mortgagor vacates the property, the mortgagee can ask the sheriff or bailiff to go to the property to change the locks. If the mortgagor enters the property without consent after the mortgagee has taken possession, they run the risk of being accused of trespassing.

The mortgagee is legally entitled to enforce the judgment; however they may not always immediately do so. A mortgagor could try negotiating with the mortgagee even after judgment to remain in the property and continue to make repayments. The mortgagee has discretion as to whether they want to negotiate with the mortgagor. Mortgagor’s who negotiate arrangements such as those described above need to be aware that the mortgagee can enforce that judgment in the future, so the arrangement would continue to exist only at the discretion of the mortgagee. The mortgagee has 12 years from the date of the judgment to enforce it.

Case Study

In July 2008, Smith entered into a loan agreement with Lovely Loans Pty Ltd (Lovely Loans) for an agreed amount of $200,000.00 secured over his residential home. In August 2009, Smith was made redundant from his employment. Lovely Loans granted a hardship variation allowing Smith to cease repayments for the months of August, September and November of 2009.

In December 2009, Smith was still unemployed. Subsequently, he missed the
December 2009 and January 2010 payment. In February 2010 he was issued with a default notice prescribing 30 days to remedy the default and make the normal repayments. Smith did not remedy the default within the 30 days.

On 13 March 2010, Lovely Loans started legal proceedings and subsequently a
judgment was entered, allowing Lovely Loans Pty Ltd to take possession of the property. However, prior to Lovely Loans enforcing the judgment, Smith won
$20,000.00 playing lotto and used the money to pay off the arrears owing. Smith gained employment and continued to make the repayments to the loan. He thought he had no worries because his loan was up to date. Lovely Loans was yet to enforce the judgment. However, in May 2016 Smith missed another repayment. A few days later he received a notice requesting he vacate the property. Smith owed Lovely Loans $180,000.00

Q: What is his legal position?


Paying off the arrears owing on the loan does not mean the judgment has no effect. It simply lessens the amount owing to the bank. The judgment can still be enforced because the court ordered that he pay the full amount of the loan, not just the arrears.

It is open to Smith’s to pay out the contract (refinance) or to try and negotiate with Lovely Loans to remain in the property and continue making repayments or to sell the property himself. However, if Lovely Loans does not want to negotiate then his options are limited at this late stage.

*Reproduced in part from an article written by the Consumer Credit Legal Service (WA)

1 comment:

  1. By definition, a Notice of Default is the letter that is filed by the lender against the borrower when they fail to pay their monthly mortgage obligations, even after being given a grace period to repay delinquencies.
    If you wish to know more you can take a peek at- notice of default