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Assessing Failed Loans and Debts
Last amended: 7 November 2007
Assessing failed loans
The assessable asset value of an existing loan is the amount still owed to the person but does not include any interest payable on the loan. This applies whether or not the loan is performing to the terms of the loan agreement.
Loans may be secured against assets such as property. The value of the asset the loan is secured against does not affect the asset value of the loan.
If a failed loan still exists, the loan can be:
- a disregarded asset if the hardship provisions are satisfied, and
- exempted from deemed income rules if the deeming exemption provisions are satisfied.
Special rules to assist people with failed loans
Whether a person can be assisted by the hardship rules or by a deeming exemption will depend on their particular circumstances.
The hardship rules may be used to disregard the value of an unrealisable asset such as a non-performing loan where the person has their rate of payment assessed under the assets test. A reduced assessable asset value can be applied to a loan when a company under administration is put into liquidation, or placed under a deed of company arrangement. Loans to the company are regarded as ceasing to exit from the commencement of administration, as long as this date is not more than 6 months before the person applies to access the financial hardship rules.
The reduced assessable asset value can be determined once a creditors' meeting has decided on liquidation of the deed. Income support payments can be reassessed and any arrears paid, backdated to the date when the company was place in administration.
A loan being disregarded under the hardship rules is still deemed to earn income. A deeming exemption should be applied for if this deemed income affects the rate of payment.
For a loan to be considered an unrealisable asset under the hardship rules the lender must have started to take the necessary action to have interest paid and/or to get back their capital. A loan can be treated as unrealisable even if at some future date the lender may be able to get some or all of their capital back.
Where the person has their rate of payment assessed under the income test they may be able to have the loan exempted from deeming. A loan exempted from deeming is not deemed to be receiving income. A deeming exemption does not change the asset value of the loan.
When a loan no longer exists legally
Legally, a loan ceases to exist at the time it is repaid, or when the debtor is formally released from the loan contract under a bankruptcy, or where the loan is forgiven, or if the loan is legally irrecoverable.
For income support purposes, there are some other situations where a loan is also treated as no longer existing. Although there is no longer a loan there may be another type of asset, such as a debt.
Loans which still exist are assessed using the amount still owed, whereas debts are assessed using the recoverable value.
When a loan no longer exists for income support purposes
A loan no longer exists for income support purposes when:
- it is repaid,
- the borrower is bankrupt,
- the borrower enters a debt agreement under Part 9 or 10 of the Bankruptcy Act 1966 (Cwlth),
- the lender forgives the loan, usually via a deed or gift of release (the deprivation provisions will apply in these cases),
- the lender takes a loan contract to court to have it enforced and obtains a court order to allow collection of the money (the loan becomes a debt because the debtor is required to pay because of the court order rather than the loan contract),
- the lender takes a loan contract to court to have it enforced and is unsuccessful in court (the amount is no longer owing),
- litigation is considered but is not pursued based on the evidence showing insufficient assets to satisfy a court order,
- the lender seizes the asset against which the loan is secured (the property becomes the asset of the lender: however, if the lender has the right to enforce the loan contract against an individual or the directors of a company on a personal basis, the loan will still exist),
- property against which the loan is secured is sold and the proceeds used to repay some or all of the loan,
- a creditors' meeting decides that the company that borrowed the money is to be wound up or placed under a deed of company arrangement (the deprivation rules may apply if the lender could have taken action to pursue recovery of the loan but chose not to do so), or
- the period specified in the Statute of Limitations has elapsed since the date of the loan, or last repayment, or demand to repay (whichever is the later) so the loan is not legally able to be recovered (the deprivation rules may apply if the lender could have taken action before the period specified in the Statute of Limitations but chose not to do so).
Under the hardship provisions, loans to a failed company can be regarded as ceasing to exist from the date the company was placed in administration, as long as this date is not more than 6 months before the person applies to access the financial hardship rules.
Effectively Failed Loans - Director's Loans
In limited circumstances, where a loan does not fulfil the above criteria, it may still be able to be considered a failed loan if it can be shown that the loan is effectively irrecoverable.
Assessing an asset as effectively irrecoverable does not require, for example, that the company to which the Director’s loan was given must be officially bankrupt or wound up, but it will mean something more than the company being in financial trouble.
For example, where the finances of the company are in such a condition as to make the short-term future of the company untenable, it is more likely that we can consider the Director’s Loan failed.
However, the presumption should always be that if the company is still in existence and aspires to continue to do business as an ongoing concern, that the asset is still hypothetically realisable and therefore the loan should be continued to be held in assessment.
Fraudulent investment schemes
A pensioner may consider they have made a particular sort of investment, including lending money to a company or individual for a specific purpose. In some instances where fraud is involved this arrangement may be a sham. The money may not have been invested but taken for personal use.
Some fraudulent arrangements are complex and involve forged documents or moving money through a number of companies. In the initial stages some fraudulent schemes pay interest to investors so it may be some time before the real nature of the scheme is identified.
Until legal processes have established that fraud has definitely occurred the pensioner may be able to be assisted by a deeming exemption or the hardship rules. Once it has been established that the money has been misappropriated and no investment exists, no asset value is maintained.
Some defrauded investors may be able to take action for compensation for some or all of their loss of capital. The possibility that they may qualify for this type of assistance is not an asset.