Understanding your liability

Contributed by Ian Macdonald and current to 1 September 2005

ACCELERATED PAYMENT ON DEFAULT

A borrower is obliged to make specified payments under the contract. The credit provider is generally not entitled to demand payment of the total amount outstanding under the contract unless there is an on demand facility under the contract.

An on demand facility is a provision in a credit contract under which the credit provider can demand that the debtor pay out the contract immediately, even though the debtor is not in default.

When a debtor defaults in their obligations under the loan contract, the credit provider may require the borrower to pay out the contract immediately if the contract contains an acceleration clause. Under the acceleration clause, the debtor’s obligation to pay the monthly instalments at particular dates is accelerated and the whole amount owing under the contract becomes immediately due and payable. This allows the credit provider to sue for the entire debt rather than take action on each individual payment that is not made.

The Code, the Credit Act, and the Hire- Purchase Act impose restrictions on how acceleration clauses can operate.

CO-BORROWERS, JOINT AND SEVERAL LIABILITY

Where there is more than one borrower on the contract, borrowers may be called coborrowers. Each co-borrower is liable to the credit provider for the whole amount borrowed. Each co-borrower is liable to pay the credit provider the whole of the amount financed, fees and charges payable on the contract, interest payable and enforcement expenses.

This means that if there is default, the credit provider can pursue either borrower or both borrowers until the entire amount is paid. If one borrower dies or becomes bankrupt, the other remains liable for the entire debt.

SEXUALLY TRANSMITTED DEBT

Sexually transmitted debt is a phrase used to describe a situation where one partner in a relationship assumes legal liability for the other partner’s credit contracts. This phenomenon is generally associated with women, though men may be the victims of sexually transmitted debt. In sexually transmitted debt, the main reason the woman’s name appears on either the credit contract or guarantee is because of her relationship with the debtor rather than her intention to enter a legally binding agreement with the financial institution. Often women are under emotional pressure to “keep the peace” in a relationship or show support for their partner in entering into a joint debt.

Nevertheless, credit providers may require women to take legal responsibility for the debt even though it was clear that the women did not intend to have any legal liability for the debt.

Another wide-scale practice is the practice of including women as co-borrowers on contracts that finance cars for their male partners. The woman may derive some “benefit” from the use of the vehicle; however, the intention of the woman was not to assume legal liability for her partner’s vehicle.

Problems with these contracts typically arise when the relationship breaks down, one partner assumes liability for the payments and that partner defaults in their obligations under the loan contract. The partner who retains possession of a vehicle is generally the male as the vehicle was purchased for him.

Under a Family Court order or agreement, a husband may be required to indemnify his wife in relation to debts. Recent amendments to the Family Law Act 1975 (Cth) enable the Family Court to make orders binding third parties. Accordingly, the Family Court could make an order changing the terms of the finance contract, to the effect that the wife is no longer liable under the contract. This change can only be made by the Court if it is reasonably likely that the debt will be paid by the husband. To date, there has not been a similar change to the Western Australian Family Court Act 1997, so this is not possible if the parties have not been married to each other.

GUARANTORS

A guarantee is a contract between the credit provider and the guarantor. The guarantor promises the credit provider that they will pay if the borrower does not pay. The guarantee provides security for the borrower’s obligations under the credit contract, which is called the principal contract.

Commonly, the credit provider requires additional security in the form of a guarantee when the credit provider believes there is a real risk that the borrower will not be able to repay the loan. The guarantor will then be required to pay.

In conjunction with a guarantee, guarantors may be asked to provide security for their obligations in the form of a mortgage over property owned by the guarantor. In the event that the borrower does not pay and the guarantor is unable to pay, then the credit provider can sell the guarantor’s property to recover the amount that the borrower owes.

When financial institutions require a guarantor as a condition of loan approval, potential guarantors should carefully consider the financial reasons for requiring a guarantor. Financial institutions will assess a borrower’s capacity to repay the loan (see ‘Credit Assessment’ later in this chapter). If the credit provider believes the borrower may default because of a marginal capacity to pay or due to some other factor, the credit provider may require additional security in the form of a guarantee. Potential guarantors should remember that credit providers have much more information than guarantors about the debtor and their capacity to pay. If a guarantor is required, the credit provider’s assessment has been that there is a real risk that the borrower will not be able to repay the loan.

MORTGAGES

A mortgage gives the credit provider (mortgagee) the right to take possession of and sell the goods or land mortgaged if the debtor (mortgagor) fails to comply with an obligation under a credit contract. A guarantor may also enter into a mortgage in relation to obligations under a guarantee.

Mortgaged property belongs to the mortgagor. If the mortgagor defaults, the credit provider has the right to take possession of mortgaged property and sell the property, subject to any legislative restrictions on possession and sale.

Mortgages held by the credit provider over goods or land may only be enforced against subsequent owners of the property if they had notice (they knew or should have known) of the credit provider’s interest.

Mortgages against land are registered on the borrower’s Certificate of Title. Some mortgages over goods (goods mortgages) may be registered under the Chattel Securities Act 1987 (WA).

CHATTEL SECURITIES ACT 1987 (WA)

The Chattel Securities Act regulates the registration of security interests in registrable goods. The mortgaged goods are placed on a register. The register in Western Australia is called REVS (The Register of Encumbered Vehicles). Contact details for REVS are: Department of Consumer and Employment Protection, 219 St. George’s Terrace, Perth, Telephone: 1300 304 024 (cost of a local call). REVS can also be accessed on line at: bizline.docep.wa.gov.au/revs.

When the credit provider has placed on the register their interest in the goods, subsequent buyers of the goods will be deemed to have notice of the mortgage. It does not matter whether the borrower knew about the registration or not. The Act makes it quite clear that the purchaser is obliged, prior to purchasing the goods, to check the register to see if the goods are encumbered, otherwise the credit providers can enforce their rights under the mortgage against the subsequent owner.

When a credit provider has a mortgage over the goods but has not registered its interest, or the mortgage cannot be registered, subsequent purchasers who buy the goods for value without notice of the mortgage will buy free of the security interest. In other words, the credit provider’s right to seize and sell the mortgaged goods is extinguished.

Registrable goods in Western Australia include motor vehicles as defined in the Road Traffic Act 1974 (WA), trailers, semi trailers, caravans, boats and prescribed farm machinery. Potential purchasers of registrable goods are advised to check the Register before purchasing goods to ensure that the goods are not encumbered.

INTEREST FREE PERIODS

A proliferation of credit products in recent years advertised as “buy now pay later” schemes have created some confusion about the definition of the “interest free period”. Many consumers believe that the products advertised do not accrue any interest during the period payments are not due under the contract. The phrase “interest free period” has many different meanings and contracts should be read carefully to determine the specific meaning of the interest free period.

Sometimes interest continues to accrue at the contract rate during the non-payment period. Payments are merely deferred. Interest continues to accrue on the outstanding balance.

In other instances, interest is not charged only if the goods purchased are paid for in full at the end of or during the non-payment period. When the goods are not paid for in full, interest is added for the non-payment period to the outstanding balance at the conclusion of the non-payment period. Other contracts provide that interest is not payable for the nonpayment period.

All these schemes rely on the consumer entering a credit contract. The credit contract is usually by way of a personal loan or a credit card facility. Characteristics of these loans are that a distinct credit provider, not the retailer, provides the finance. The interest rate can be substantially higher than in respect of other credit.

CREDIT CARD FACILITY

Borrowers are issued with a credit card for the purchases made. The card has a credit limit that may be greater than the goods purchased. The terms and conditions of the card are generally similar to other continuing credit contracts. Payments and interest may or may not be payable for a specified period. Interest rates on these credit cards are often substantially higher than credit cards issued by other financial institutions.

LOAN CONTRACTS

Borrowers are asked to sign a contract for the value of the goods. There is no ability to borrow further funds under the terms and conditions of the contract. Sometimes there are two contracts for the same transaction. The first contract is signed at the time the goods are purchased and is for the non-payment and/or the interest free period. The second contract is signed at the conclusion of the interest free or non-payment period. Interest rates on these loans are often substantially higher than rates offered on personal loans by other financial institutions.

PRIMARY AND SECONDARY CARDHOLDERS

Financial institutions have for many years issued additional credit cards for credit card account holders. Additional cards are issued on the direction of the primary cardholder to the benefit of secondary cardholders. Partners are often secondary cardholders; parents may also be primary cardholders while their children are secondary cardholders.

This practice is fraught with danger. The secondary cardholder has generally no liability to the financial institution for purchases made on the card. The primary cardholder is legally liable for all purchases made on their card and any additional cards issued. The secondary cardholder may only be liable to the primary cardholder for purchases made by them.

If the secondary cardholder is abusing the credit card, it may be impossible to cancel the card without presenting the additional card at the financial institution for cancellation. It is a term and condition of most credit cards that the plastic cards remain the property of the financial institution and cancellation without the card is not permitted. In these circumstances it may be possible to argue that the card has been stolen, as the additional cardholder is using the card without the authority of the primary cardholder. If the card issuer is a bank and they refuse to cancel the card, assistance should be sought from a solicitor or from the Banking and Financial Services Ombudsman (see ‘Alternative Dispute Resolution Schemes’ in CONSUMER PROTECTION ).

ASSIGNMENT BY THE BORROWER

Assignment by the borrower is where the borrower (the assignor) wishes to transfer his rights under the contract to another person (the assignee). The borrower is not able to transfer their liabilities under the contract to another person without the written agreement of the lender. In many cases the lender will wish to have new contractual arrangements, where both assignor and assignee are liable. This means that when the assignee does not make the payments under the contract, the assignor is liable to make the payment to the credit provider. The assignor can sue the assignee for the payments that have not been made. However, this ability to sue the assignee may not be very helpful, as it is generally the assignee’s inability to make payments to the credit provider that necessitates the credit provider’s action against the assignor.

A borrower is in a better position if instead of assigning their rights, the original contract is discharged and the person who wishes to assume the rights under the contract enters a new contract with the credit provider.

Contractual terms generally do not allow the borrower to assign their rights. Other contracts require the permission of the credit provider prior to the borrower assigning their rights. The Code, and the Credit Act, provide that the mortgagor can assign their rights to another person with the permission of the credit provider and the permission of the credit provider cannot be unreasonably withheld. The Credit Act and the Code provide that the cost of stamp duty and fees payable to a duly qualified legal practitioner are payable by the mortgagor and/or the assignee to the credit provider.

ASSIGNMENT BY THE FINANCIAL INSTITUTION

Assignment by the credit provider occurs where the credit provider transfers its rights under the contract to another person. The credit provider is not able to transfer its liabilities under the contract to another person.

The Credit Act provides that the credit provider cannot assign its rights to another person unless the other entity is a licensed credit provider. (There are some exceptions to this rule.) Debtors, mortgagors and guarantors have the same rights against the assignee as if they were the credit provider, except that the assignee’s obligations to the debtor, guarantor and/or mortgagor may not be greater than the amount payable to the assignee at the time of the assignment.

Similarly, the Code allows credit providers to assign their rights to another person. Generally, the Code will not impose further liabilities to the credit provider once the assignment is effected. The debtor, mortgagor, and or guarantor have the same rights against the assignee as they would have had against the credit provider.

There is no obligation under the Credit Act or the Code to inform the debtor, mortgagor, or guarantor that the credit provider has assigned its rights to another person.