The story
In 2002 Fatima’s work mate, Tracy, said her son, Jason, needed someone to guarantee a loan for him to buy a car. Fatima agreed to guarantee Jason’s loan for $5,000 to be repaid over two years. The loan was secured by Jason’s car. Almost immediately Tracy, Jason and the car disappeared. Jason did not repay the loan.
In 2007 the finance company obtained summary judgment against Jason and Fatima. In 2008 an attachment order was placed on Fatima’s income requiring her to repay the debt at $20 a month. The finance company was unable to find Jason. Fatima started paying $20 a month, and did not miss any payments.
In 2011 the finance company decided $20 a month was not enough to repay the debt and demanded Fatima increase the payments to $40 a month or it would repossess her property. Fatima could not easily afford the increase but started paying the finance company $40 a month.
Although Fatima had not missed any payments, in 2012 the finance company wrote to her again advising she had defaulted on her loan. Unless she paid $9,000 within 7 days the finance company would repossess her household goods. Fatima contacted the finance company and was told she needed to increase the payments to $160 a month. Fatima contacted her budget adviser who explained to the finance company that Fatima could not afford the increase. When the finance company did not accept the budget adviser’s advice and continued to threaten repossession the budget adviser referred Fatima’s complaint to FSCL.
Dispute
Fatima accepted she owed the finance company a debt, but considered the finance company’s demands unreasonable. Fatima did not agree the finance company was entitled to repossess her property, as only Jason’s car was listed as security. Fatima also argued that as the car had been repossessed the finance company was not entitled to charge interest on the outstanding debt.
Our review
We agreed the loan was secured by Jason’s car. However the loan agreement did not include an all present and after acquired property clause (“AllPAAP”). In our view the loan agreement did not allow the finance company to use the power of attorney granted by Fatima to the finance company to appropriate her property as security for the loan and had no right to repossess her household goods.
If the car had been repossessed, section 35 of the Credit (Repossession) Act 1997 would have prevented the finance company continuing to charge interest. Unfortunately, as there was no evidence the car had been repossessed, the law allowed the finance company to continue to charge interest.
However, to give Fatima some incentive to repay an unsecured debt, we proposed the finance company:
- crystallise the debt at $7,200 and stop charging interest
- credit towards the $7,200 all payments made by Fatima since July 2008
- credit towards the outstanding balance $500 in recognition of the stress caused to Fatima by the finance company’s unlawful repossession threat
- allow Fatima to continue to repay the debt at $20 a month.
Outcome
Fatima accepted our proposal, but the finance company did not. After discussion with the finance company it became clear the finance company was not prepared to negotiate an affordable repayment agreement. Because Jason’s car had never been repossessed FSCL could not require the finance company to stop charging interest on the debt. As the outcomes available through FSCL are compensatory FSCL could not force the finance company to accept any reduced repayment amount. Instead FSCL recommended, and Fatima accepted, compensation of $500 for the stress associated with the finance company’s threatened repossession.
Fatima’s budget adviser indicated an intention to continue to try to negotiate a repayment agreement with the finance company.
Lesson
You should never sign a guarantee without seeking independent advice from a third party, preferably legal advice.
You should always bear in mind that if the principal borrow cannot afford to repay the loan and stops payments, as guarantor, you will be liable for the full amount of the unpaid loan and all interest and charges.
