Assessing a failed loan 108-04020020

This document outlines the assessment of a failed loan. A loan is part of a customer's assessable financial assets and is subject to the deeming provisions. If a customer is receiving limited or no return on the loan, the customer may request the loan be exempt from deeming (by the Minister for Social Services), or the loan may be assessed as a failed loan by a Complex Assessment Officer (CAO) and the asset value may be disregarded.

A loan or debt is not usually accepted as being a failed loan unless legal recovery action has, or is, being taken. If a loan does get accepted as failed but the customer had not previously taken action to get their maximum return, asset deprivation provisions amounting to the amount they should have received may apply.

For example, a company had $100,000 in assets, owed our customer $300,000 and others $200,000. The others were listed as the only creditors on wind up and so received 50 cents in the dollar. Because our customer did not attempt to get back his loan, deprivation occurred. If it would be reasonable to believe that had he joined the list of creditors with equal entitlement, they would all have received 20 cents in the dollar, we can assess that the customer deprived himself of $60,000. If however the customer can justify not becoming a creditor because his liability ranked such that he would not have received anything, then there was no deprivation.

If a loan is declared failed after the customer took action, no deprivation occurs.

If a loan or debt is legally irrecoverable, because the debtor is unable to repay or because other debts have legal priority, the case must be sent to the CAO who will recommend whether or not a loan is a failed loan and can be disregarded as an asset or a value less than face value. The loan may still need to be assessed under the rules for deeming exemptions if the deemed income affects the customer's rate of payment. If the loan is assessed as being a failed loan, then it is no longer assessed as an asset.

Legally a loan ceases to exist at the time it is repaid, or when the debtor is formally released from the loan. A debtor is released from a loan contract when the loan is forgiven.

For social security purposes, there are some other situations where a loan is also treated as no longer existing. These loans are sometimes referred to as irrecoverable loans, though this term is not mentioned in the Social Security Act. Although there is no longer a loan, there may be another type of asset, such as a debt.

For more information see Loans that no longer exist on the References page.