Samantha complained to FSCL in July 2014 on behalf of her mother Sarah that the balance of Sarah’s debt, $17,538.54, to finance company Loans to You, was too high.
Samantha complained that penalty interest and fees, and court fees, had been charged incorrectly to the balance of the debt following the repossession of the security for the debt (a car) in 2005.
Samantha argued that section 35 of the Credit (Repossession) Act 1997 applied. Section 35 says that a debt is crystallised or ‘frozen’ at the point the security for the debt is repossessed. This means no interest or fees can be added to the debt after repossession and sale of the security item.
Loans to You’s view
We wrote to Loans to You and asked for its view on the complaint. Loans to You explained that in 2004 Sarah had taken out a loan with another finance company for $5,220. Loans to You purchased Sarah’s debt from the other finance company in 2006. Loans to You said there had been an error at the time the debt was purchased and the starting point of the debt at that stage should have been $5,714.68 not $9,156.90. Loans to You said that the current balance of the debt was actually $7,511.45.
Loans to You said there was no reason why it could not charge interest going forward after it had purchased Sarah’s debt. This was because Sarah was effectively on a new contract with Loans to You and Loans to You argued that it had fresh contractual rights at the time it purchased Sarah’s debt. This was despite the fact that the original finance company had repossessed and sold the original security for the loan in 2005 (which would have triggered section 35).
We looked at at the Loans to You’s contract and the old finance company’s contract, the account statements, and copies of court orders sought by Loans to You against Sarah.
In July 2008, Loans to You had applied to the court for an order stating that Sarah was required to pay it $10,571.84 (judgment). An attachment order issued by the Court in September 2009 ordered Sarah to pay $30 each week to Loans to You from her income. The attachment order stated that the balance of the debt at that time was $10,942.23.
FSCL does not have the power to overturn any court judgment or order. This meant that the September 2009 Court order stating that the balance of the debt was $10,942.23 at that date, was definitive.
After a court order is issued, a creditor is entitled to continue charging interest at the ‘court rate’ under section 65A of the District Courts Act 1947. This is called ‘statutory post-judgment interest’, and the interest rate changes from time to time. Based on the date Loans to You sought judgment against Sarah, the statutory post judgment interest rate was 8.4% per annum, applied monthly.
In some instances, the credit contract between the creditor and the debtor may state that default interest under the contract can be charged in addition to statutory post-judgment interest. The contract between Loans to You and Sarah made it clear that Loans to You’s right to charge default interest under the contract, and statutory post judgment interest, did not ‘merge’ once judgment had been issued. This meant that both types of interest could be charged.
The settlement offer
However, Loans to You reconsidered Sarah’s complaint and offered to reduce the balance of the loan to $5,200 and suspend all interest charges in the future. Loans to You said that Sarah would need to continue making weekly payments at $40 per week.
Loans to You said believed it had charged fees and interest correctly, but made the offer to try to make payment of the loan within a reasonable period of time achievable.
FSCL facilitates resolution of the complaint
We calculated how much the balance of the loan would have been if statutory interest at 8.4% had been charged on the $10,942.23 amount since 2009, taking into account the amounts Sarah had paid towards the debt since that time. The balance was still around $10,500. We told Sarah it was a good option for her to accept the settlement offer from Loans to You. It would mean the debt would be paid in 2 ½ years at $40 per week.
Loans to You probably should have explained to Sarah that it had the right to charge both contractual and statutory interest, but in any event, the balance of $5,200 was a lot lower that it could be. In addition the fact Loans to You had offered to freeze the debt was very beneficial. Sarah accepted Loans to You’s offer and the complaint was settled.