Understanding Financial Defaults And How to Manage Them

November 14, 2019

Understand how a default is registered: Why and How

Learn about situations when a default can be removed

Credit repair companies versus doing-it-yourself

About Defaults

If you miss a payment on a debt you owe, the debt may go into default, which means the lender has decided you are not going to pay the money back. At this point, the lender has ended your agreement and can take further legal action to collect the debt.

Once a default has happened, it will be noted on your credit report. Any lenders that look into your account in the future will be able to see you’ve defaulted on a previous debt.

Once a default has been listed, it does not get removed when you pay back the debt. Generally, defaults stay on your credit history for five years. If a default’s been listed on your report, you can still improve your credit report a little bit by making sure the debt is paid or settled. If that happens, the credit provider has to update your credit report to say you no longer owe the debt. Once you have paid a default, it will remain on your history for the full five years period, though it will be listed as “paid”. Also, if you have other loans and are able to continue paying your repayments on time for those loans, then your good repayment history may help to reduce the impact of the default on your credit report and credit score.

Situations When a Default May Be Removed

There are some situations where a default listing can be removed from your credit report. These situations are limited to when the credit provider has made a mistake, or the overdue payment happened because of something outside of your control (like a natural disaster or bank error).

In order to work out whether you can ask for the default to be removed, you should get a copy of your credit report from the credit reporting bodies. It’s free to get a copy from each credit reporting body once a year, or if you’ve applied for credit and been refused in the last 90 days.

Understanding Credit Repair Companies

Whilst credit repair companies do provide a service, they usually charge fees that can be in the thousands, and they don’t have the power to change things that aren’t wrong.

If you think the default listing is incorrect, you can get help to have it removed for free.

The first step is to raise your concern with the credit provider or credit reporting body. If they don’t help you, you can raise your concern with the credit provider or credit reporting body’s external dispute resolution service. These services are independent bodies who look into complaints. You have the right to do this for free.

If you need help, you can ask a financial counsellor or community legal services for advice. Financial counselling is free, independent and confidential.

General scenarios where a default will be removed from your credit report:

• The debt wasn’t yours. This could happen if there’s a simple case of mistaken identity or someone has fraudulently taken out the loan or bought something on credit in your name.

• The credit provider didn’t send you the correct written warnings – at the right time. Before listing a default on your credit report, the law requires the credit provider to send you written warnings. If you don’t think you received the written warnings, talk to your credit provider and ask them to give you copies. Did your address change recently? The credit provider has to send the warning to your last known address, so think about whether you told the credit provider your new address.

• You had asked for hardship assistance. If you are struggling with your debt, you can ask your credit provider to help you through a request for “hardship assistance”. Once you have asked for hardship assistance, the credit provider has to respond to you in writing. The credit provider can’t list a default while they are thinking about your request and for 14 days after telling you the outcome. If the credit provider listed the default before 14 days had passed, then it may be removed. You’ll need to be able to show that you actually made the request for hardship assistance.

• The default happened because of something outside of your control. This could include things like natural disasters or an error by a bank in processing a direct debit payment. You’ll need to explain why the default was an unavoidable consequence of something happening that was beyond your control, and show that you’ve made arrangements with the credit provider to pay the overdue debt.

• The debt was from a long time ago and is ‘statute barred’. A debt may be statute barred if you haven’t made any payments to it for a number of years. For most debts this is six years, but it can depend on what state or territory you live in and what type of debt it is (a home loan is usually longer). This can be quite complicated; if you think this may apply to you, you really should get some legal advice. You can ask a community legal service for free advice.