Contractual default interest may not merge with judgment

The loan contracts and Court orders

Steve signed a loan contract with a finance company, Original Loans, in 2003. The loan was for $8,000 cash, and the total amount payable under the loan was around $14,700 including interest and fees. Steve initially kept up with his payments but then fell into arrears. Takeover Loans purchased Steve’s debt from Original Loans.

 

In April 2009, Takeover Loans obtained a Court order saying that Steve owed it around $12,000 (“judgment”). In November 2009, Takeover Loans obtained a further Court order stating that $35 per week had to be paid from Steve’s wages, towards the judgment amount (“the attachment order”).

 

In February 2010, Takeover Loans refinanced Steve onto a new loan agreement which was on different terms than the Original Loans contract. Takeover Loans reduced the loan balance by around 30% to $8,300 under the new contract. The new Takeover Loans contract stated that Steve was to pay $40.82 per week. Standard interest was at 0%, default interest at 10% per annum and default fees were $1 per day.

 

Steve’s payments

Steve paid the balance under the new loan contract regularly, but in December 2010 his financial circumstances changed and he started paying the debt at $5 per week. Takeover Loans continued to charge default interest and fees under the new loan contract but when the change in financial circumstances did not look to be temporary, Takeover Loans suspended default interest and fees in February 2011. Steve brought his payments back up to $41 per week from mid September 2011. Takeover Loans then wrote off the arrears balance (which sat at around $1,200) in November 2011.

 

Because of the Christmas and New Year holiday period, Steve’s payments were a day late during the 2011/2012 holidays. Steve’s payments then defaulted around 12 times during 2012 and 2013. Some of these missed payments were made up by Steve and he increased his payments to $61 per week from December 2012.

 

The complaint

Steve stopped making payments in early 2014 as he believed he had already paid the debt in full under the attachment order. Takeover Loans said the balance of the debt sat at around $2,000 in January 2014. Steve said that the dishonoured payments were caused by an issue with his bank. Takeover Loans offered to reduce the balance of the debt by $500 but this was not accepted by Steve. Steve also said that he was never told about the arrears continuing to accrue on his account by Takeover Loans.

 

Takeover Loans sent Steve a letter in January 2014 stating that Steve needed to pay $2,000 within 7 days, otherwise Takeover Loans was going to apply to the Court to have Steve declared bankrupt.

 

Review

Firstly, because Steve had already referred his complaint to FSCL and an investigation was underway, we considered the threat of Court action in the letter Takeover Loans wrote to Steve in January 2014 breached FSCL’s terms of reference. We considered it appropriate for Takeover Loans to credit Steve’s account by $250 because of the inconvenience and stress the letter caused him.

 

We looked at the provisions of the new loan contract signed by Steve in February 2010. A clause in the contract said that default interest could continue to be payable after judgment and that the obligation to pay default interest did not ‘merge’ with the judgment. In other words Takeover Loans had the right to charge default interest, despite the judgment and the attachment order. In addition, because Steve had signed a new loan contract in February 2010, Takeover Loans acquired fresh rights to charge default fees at $1 per day.

 

We thought that Takeover Loans could have done more to warn Steve about the need to make payments before his usual payment dates during the Christmas and New Year holidays in 2011/2012. We thought it was unfair for Takeover Loans to charge default fees and interest because payments during this time were one day late.

 

We thought it highly unlikely that the dishonoured payments were bank errors. It was more likely that Steve did not have enough funds in his account at the times the payments defaulted. We considered Takeover Loans could charge default interest and fees from when Steve started defaulting on payments from April 2012.

 

Formal Recommendation

We acknowledged that there was a 30% reduction in the balance of the debt when Steve signed the new loan contract with Takeover Loans in February 2010, which was of benefit to him. We also noted that it could have been more clearly outlined to Steve by Takeover Loans that his account was in arrears and that he needed to make up missed payments and the default interest/fees which had accrued because of the missed payments. However, we also were of the view that there had been several letters sent to Steve about the fact that the loan was in arrears. On balance we thought Steve was sufficiently notified and should have been aware that default fees and interest were accruing on his account.

 

Taking into account Takeover Loans’ recalculations and the $250 payment for inconvenience, we calculated that the balance of the debt sat at $1,080 on 21 February 2014. As Steve had not made payments despite our case manager’s suggestion that he do so, we considered it appropriate for Takeover Loans to debit the account with default interest and fees from 21 February 2014 onwards.

 

Steve asked that Takeover Loans be required to reduce the arrears balance to zero and remove listings it had placed with a credit reporting agency. Takeover Loans confirmed that its listing with the credit reporting agency listed the debt as ‘Scheme of Arrangement’, which Steve was happy with.

 

With our assistance, Takeover Loans and Steve entered into an agreement whereby Steve would pay $60 per week towards the debt, with default interest and fees continuing to accrue until the balance of the debt was paid in full. Takeover Loans also agreed that upon full repayment of the debt, it would ensure it listed the debt as ‘paid’ with the credit reporting agency.