Bankruptcy Law: Comprehensive Reform of Debt Agreement System
Monday 19 February 2018 @ 10.53 a.m. | Corporate & Regulatory | Trade & Commerce
On Wednesday (14 February 2018) the Federal Government introduced the Bankruptcy Amendment (Debt Agreement Reform) Bill 2018 (the Bill) into the House of Representatives. The Attorney-General, Christian Porter, has described the legislation in a media release as the "first comprehensive overhaul of Australia’s debt agreement system in a decade".
About Debt Agreements
Debt agreements are designed to give people in financial difficulty time to clear their debts and get back on their "financial feet", avoiding the more formal process of bankruptcy and its potentially longer-term impact on their financial circumstances.
In the media release the Attorney-General describes debt agreements as an "important and popular alternative to bankruptcy" for individuals in or facing financial difficulties. He also indicates that the number of new debt agreements has almost doubled in the last decade while bankruptcies on the other hand have been significantly reduced.
Debt agreements are typically described as "binding contracts made between debtors and their creditors in accordance with personal insolvency law", the aim of which is giving debtors experiencing financial stress the option of compromising with creditors. The debt agreement option is not available for all debtors as income and and debt limits apply.
The process usually results in a situation where a debtor pays their creditors an agreed reduced amount by way of installments over an agreed time period and such agreement is assisted by a debt administrator who negotiates the process and distributes payments to creditors.
The reason for the rise in popularity of debt agreements is said to be that debt agreements "have fewer adverse consequences than bankruptcy" - for example, a debtor may be able to reach an agreement where they are allowed to keep their home.
There are however, unfavourable consequences of debt agreements which are said to include:
- having a record on the National Personal Insolvency Index;
- difficulties obtaining credit;
- the debtors’ ability to retain a licence in various professions,and
- the need to disclose the debt agreement in certain situations.
Problems with Debt Agreements
In a recent article, The Conversation listed some problems with debt agreements:
- many instances of debt agreements that are unsuited to the needs of debtors have been found, especially where high administration fees have been applied which are detrimental particularly for low income debtors;
- aggravation of financial stress for debtors who have entered agreements which they cannot afford;
- the making of unsuitable agreements with debtors who rely primarily on Centrelink benefits which are meant to provide a basic standard of living unable to be diverted in part towards debt agreements;
- the making of debt agreements for people whose incomes are fixed, comprising say disability or aged pension.
Reforms and Amendments Proposed by the Bill
The key aspect of the reforms proposed by the Bill is the introduction of measures to ensure debt agreements are based on an affordable payment schedule. This is to be achieved by linking the repayments to a certain percentage of income - determined in consultation with key industry bodies, consumer groups and creditor representatives.
Apart from the above key reforms include:
- Limiting the length of a debt agreement proposal to three years, allowing debtors to manage their debts in the short term and work towards a fresh start, while maintaining flexibility to allow extensions if debts remain unpaid.
- Doubling the current asset eligibility threshold (from $111,675.20 to $223,350.40) in recognition of the growing value of Australia’s property market, opening up the debt agreement option to more people who are facing financial difficulty.
- Providing the Official Receiver in Bankruptcy the ability to reject proposed debt agreements which would cause undue financial hardship to the debtor.
- Deterring unscrupulous practices by a small minority of debt agreement administrators by setting stricter practice standards; tougher penalties for wrongdoing (such as a new three month period of imprisonment if an administrator offers a creditor money with a view to influencing their vote) and granting the Inspector-General in Bankruptcy additional investigative powers to address misconduct.
- Ensuring greater professionalism into the industry by requiring debt agreement administrators to hold and maintain professional indemnity and fidelity insurance as a requirement of registration.
According to the Attorney-General's Media Release:
According to the Attorney General the proposed legislation:
Review of the Bill
The Bill was originally intended to be introduced into the House of Representatives in late 2017, but this did not happen and the Bill has now been introduced on 14 February 2018. Previously on 7 December 2017 the Senate referred the provisions of the exposure draft of the Billto the Legal and Constitutional Affairs Legislation Committee for inquiry and report by 19 March 2018.
Implementation
The reforms proposed by the Bill are to commence six months after the Bill passes Parliament, which in the Attorney-General's Media Release is said to be to give the debt agreement industry time to prepare for the reforms.
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Sources:
Bankruptcy Amendment (Debt Agreement Reform) Bill 2018 and supporting materials as available in the TimeBase LawOne Service
Debt agreements and how to avoid unnecessary debt traps (The Conversation)
