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What can happen if I don’t pay my loan?

If you do not make your payments on time and in full, you are in default under the loan contract. When this happens, the lender has the right to take you to court (also known as starting ‘enforcement proceedings’) to recover the money you owe.

If you don’t have the money, the lender can sell any assets you listed on the loan documents as security. Secured assets can be real estate, goods, a car or other property you offered to secure the loan. If you default, the lender can take the property and sell it to recover the debt.

There may be a document registered with the Personal Properties Securities Register or the Titles Registry in the Department of Natural Resources, Mines and Energy called a Bill of mortgage or encumbrance, which says the lender has an interest in the property and it cannot be sold unless the security is released.

You can only sell a secured asset if you arrange to pay out the loan, or get the lender’s permission. For example, if you have a mortgage on your house you can only sell it if you will be able to pay back all the money you owe or you reach an agreement with the lender about keeping the loan and using the money from the sale for another purpose.

What can the lender do to get their money back?

The lender will probably try to repossess any secured assets you listed on your loan documents. Before doing this they must, under the National Credit Code, serve you with a default notice telling you what the default amount is and give you 30 days to fix it by paying all the money currently owing. Even if the National Credit Code does not apply to your mortgage, the Property Law Act says lenders in Queensland cannot sell your house and land or vacant land without giving you 30 days notice. If the lender cannot find you, or believes you are trying to sell the goods or remove them without the lender’s permission, they may not have to give you a default notice before repossessing a secured asset.

If you refuse to let the lender repossess a secured asset, they can start court proceedings against you. In this case, you will receive court documents called a Form 2 – Claim and a Form 16 – Statement of claim, and you will have 28 days to file a Form 17 – Defence. Filing a defence gives you an opportunity to argue that you do not owe the money. If you receive a Form 2 – Claim, you should get legal advice immediately.

If you do not file a defence, the lender will get a judgment (order) against you. If they succeed in getting this judgment, the lender can take further steps to recover the money from you. The lender does not have to give you a copy of the judgment, but you can get a copy of the judgment from the court where it was made.

What further steps can the lender take?

The lender might apply for other orders like:

  • an enforcement hearing summons, requiring you to go to court and take supporting documents to explain your current financial circumstances
  • an enforcement warrant redirecting your earnings (garnishee of wages) so you are making regular payments towards your loan from your pay
  • an enforcement warrant allowing the lender to seize and sell some of your assets and use the money from the sale to reduce your debt.

Your Centrelink entitlements and essential household and personal items, including a basic car (up to a set value), cannot be taken from you in most situations. Check the list of exempt household items included in the Bankruptcy Regulations.

How far can this go?

You cannot be sent to jail for defaulting on your loan. But if a judgment is made against you, you could be ordered to pay the lender’s court costs and fees and it could affect your credit rating. A judgment made against you lasts for six years and can be extended for a further six years. The lender can check on you during this time to see if you can pay any money towards your debt. They cannot chase you for the loan after this time unless there are exceptional circumstances.

A creditor can follow the same court process whether they have a secured loan (where a car or a house is listed as security in your loan documents), or an unsecured loan (there are no assets listed in your loan documents to secure payment of the loan).

Will it affect my credit rating?

Yes, judgments made against you in court for secured or unsecured loans affect your credit rating, making it more difficult for you to get loans or credit in the future. Your judgment will be registered with one or more of the credit reporting agencies:

These organisations can give information about your credit history and ratings to potential lenders.

You can get a copy of Equifax’s records about your credit history free of charge.

Judgments remain listed for five years on your credit report, even if the debt is paid before that time. A default listing with a credit reporting agency will only be removed if the creditor agrees it should never have been listed in the first place or the listing contained incorrect information.

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