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The benefits of negotiating a workable and enduring repayment arrangement

Threat of sale under the Property Law Act 2007

Mrs Edna Smith contacted FSCL in February 2014. She said her husband, Mr Fred Smith, had signed as guarantor for his son John Smith’s loan from a finance company, Loan Finance Limited, in 2010. Edna said John had not made payments and Loan Finance Limited was now seeking payments from Fred.


Fred and Edna married in 2012, and bought a home in May 2013. In June 2013 Loan Finance Limited sent Fred a Property Law Act 2007 (“PLA”) notice saying that he had to pay $8,150 otherwise it would take action to have the home sold.


Fred and Edna applied to withdraw funds from their KiwiSaver accounts but there were few funds available. Fred and Edna said it was not worth Loan Finance Limited taking action to have their home sold as there was no equity in the home. In addition, the Smith’s bank had the first registered mortgage over the home, meaning the bank would receive all the proceeds of any sale. Edna said she spoke to a Loan Finance Limited’s staff member about this, and that the staff member said she ‘did not care’ and that Loan Finance Limited just did not want Fred and Edna to own a home.


Fred and Edna were of the view that the balance of the debt sat at around $4,000.


The contract

We reviewed all the information provided by Loan Finance Limited about the complaint. It appeared that in March 2010, John Smith’s debt was refinanced onto a new loan in Fred’s name only; that is, Fred was no longer a guarantor, he was the sole debtor under the 2010 contract. It also appeared that Loan Finance Limited had given a 40% discount on the balance of the old loan when Fred signed the March 2010 contract, making the new balance $7,800. The terms of the 2010 contract were 0% interest, 10% default interest, and $1 per day as a default fee. Payments were to be at $50 per week. Security for the loan was a 1992 Toyota vehicle.


The loan contract also contained an ‘all present and after acquired property’ clause (“ALLPAAP clause”), meaning Fred had granted a security interest to Loan Finance Limited in goods he owned at the time he signed the 2010 contract, and goods he may own in the future. In addition there was a clause that Fred would mortgage any land he owned at the time or may own in the future to Loan Finance Limited. The way the loan contract was worded also gave Loan Finance Limited the right to ‘appropriate’, that is, turn its mind to including further consumer goods/land owned by Fred to the loan, under a power of attorney clause in the contract.


After the March 2010 contract was signed by Fred, there were long periods of non-payment, and sporadic payments of different amounts. Default interest and fees had been applied since June 2010 to February 2014 and were continuing to accrue. As at 26 February 2014, the balance of the debt sat at $11,000.


Fred said that when he signed the 2010 contract he was not made aware of the clauses in the contract, especially the ALLPAAP clause, the appropriation clause and the power of attorney clause. Fred said he was ‘rushed into signing’ and told to initial ‘here and there’. As Fred signed the loan contract in March 2010, before FSCL’s jurisdictional start date of 1 April 2010, we could not investigate whether Loan Finance Limited had sufficiently outlined the terms of the contract to Fred.


FSCL assists the parties in reaching a suitable repayment arrangement

Fred and Edna provided a budget prepared by a budget adviser. Loan Finance Limited questioned some of the outgoings on the budget including payments towards a vehicle loan to another finance company at $150 per week. Loan Finance Limited wanted to know why Fred and Edna entered into another loan contract knowing they had the existing debt to Loan Finance Limited. Fred and Edna said that they needed to purchase a vehicle as they live rurally and have mobility problems.


Loan Finance Limited also questioned why Fred and Edna said they were unable to afford to pay the debt when they were able to make mortgage payments. We sought a copy of Fred and Edna’s latest rates notice and mortgage statement. There was negative equity in the home and there was nothing for Loan Finance Limited to gain by taking action to have the home sold. Even if the home was sold, Fred and Edna would still need to make rental payments which would most likely be about the same as their mortgage payments.


Fred and Edna said that the payments of $150 per week towards their current vehicle (which the finance company had taken a second registered security interest in), were soon going to come to an end but that Fred’s seasonal income of $200 was also soon coming to an end. Fred and Edna were concerned that Loan Finance Limited would take action to repossess their vehicle and take action to have their home sold.


Fred and Edna were also making a payment of $65 per week towards furniture, with payments towards that loan required for at least another year. Fred and Edna were not in a position to make any lump sum payment. We told Loan Finance Limited that in our view, the only sensible outcome would be for the parties to enter into a suitable repayment arrangement which was realistic and enduring. Fred and Edna said they could make payments of $30 a week.


The repayment arrangement

Loan Finance Limited considered all of the information and offered to suspend all interest and fees on the account if weekly payments of $30 commenced immediately, to increase to $80 per week once the vehicle repayments to the other finance company ended. Loan Finance Limited also agreed not to take any further repossession action or action to have the home sold. Lastly, Loan Finance Limited said it would credit the account by $1,000 in relation to legal fees which it had recently debited to Fred’s account.


Loan Finance Limited said that if any of the weekly payments were missed then it would reserve the right to recommence recovery action and add interest and fees, upon one month’s notice to Fred and Edna. Loan Finance Limited said it was not prepared to release the charging order it held over the home, or release its security interest over the vehicle, until the debt was fully repaid.


The parties agreed on the above arrangement and signed a deed of release recording their agreement, with our assistance.