Debtors facing the prospect of personal insolvency will have greater protection under amendments to the Bankruptcy Act, which are coming into place this week.
Reforms introduced under the Bankruptcy Amendment (Debt Agreement Reform) Act 2018 include changes to the length of a debt agreement a debtor can propose, debtor eligibility, the Official Receiver’s powers to refuse to accept a debt agreement proposal in exceptional circumstances, creditor voting rules, debt agreement administrator registration requirements and the Inspector-General’s investigation and inquiry powers.
The amendments are the biggest overhaul to debt agreements in 10 years and changes the length of a proposed debt agreement to three years from the day the agreement is made.
Attorney-General Christian Porter says: “The Coalition’s reforms not only protect the interests of debtors and creditors by ensuring that debt agreements are reasonable and sustainable, but it will also improve professional standards in the debt agreement administrator industry.”
Chief executive of Consumer Action Law Centre, Gerard Brody says: “What’s happening now is that there are lot of debt agreements that are five years or longer, which is a long term arrangement. A shorter arrangement will be more beneficial for the debtor to complete their repayments.”
It is only in the circumstance that a debtor owns property or has equity in their principal place of residence that they can propose a debt agreement of five years.
In addition, the amendments introduce a change to debtor eligibility as the agreements will be a ratio based on the debtor’s ability to repay.
The introduction of an affordability ratio takes into account the total payments the debtor is required to make and the debtor’s yearly after tax income in the year of the beginning of the agreement in conjunction with a low income fee.
Brody says: “Our concern with the ratio is that debtors with incomes below $12,500 will fail the test and actually won’t protect many people.”
According to the Australian Financial Security Authority (AFSA), the ratio protects vulnerable debtors while maintaining the accessibility of the debt agreements for higher income debtors that have a greater capacity to repay their debts.
Porter says: “It had become clear that aspects of the debt agreement framework and some in the industry were putting financially vulnerable people at risk of entering into agreements which were not affordable – further compounding financial stress.”
Consumer Action Law Centre’s Brody agrees: “Debt agreement administrators are paid by the person entering into a debt agreement so they have a conflict of entering into a debt agreement when it may be in the best interest of a debtor to bankrupt or consider hardship arrangements.”
The latest statistics from Australian Financial Security Authority (AFSA) reveal that in the March quarter 2019 personal insolvencies were at their lowest level since the March quarter 1995 and may fall even further when changes to the system are introduced.
AFSA recorded only 2,552 debt agreements in the March quarter 2019 which is a staggering 31.5 per cent fall compared to the same time in the previous year.
AFSA reported that in 2017/18 debt agreements made up over 47 per cent of total personal insolvencies, which is the highest that it’s ever been.
This is an increase from 1997/98, when AFSA reported that debt agreements made up just over 1 per cent of total personal insolvencies.
The changes to the legislation protect debtors from potential administrator misconduct by setting stricter practice standards and tougher penalties for wrongdoing.
A debt agreement proposal must detail the types of expenses the debt agreement administrator can recover and how they are reimbursed. This provides transparency and protects both the debtor and creditor from undisclosed fees.
Also, the Official Receiver must not request a vote from an administrator that is an affected creditor, or from a related entity to the administrator to avoid any conflicts of interest.
The new registration rules require debt agreement administrators to hold and maintain professional indemnity and fidelity insurance and criminal penalties have been introduced with a six month period of imprisonment if an administrator offers a creditor money with a view to influencing their vote.
The amendments allow the Official Receiver in Bankruptcy to reject proposed debt agreements which would cause further financial hardship to the debtor and doubles the current asset eligibility threshold to $226,700 in response to the increase in rising housing prices and making it more inclusive but may not affect any debtors.
Brody says: “I don’t think it will make a lot of difference because the vast majority of people that go into debt agreements don’t own their own home or have high amounts of assets. They suit a very small class of people and most people entering a debt agreement would be better off not doing so and getting advice from a financial counsellor about their situation.”