The Bankruptcy Amendment (Debt Agreement Reform) Act 2018 (“the Act”) was passed by both houses on Wednesday, 19 September 2018, and Royal Assent was given on 27 September 2018, meaning the new Act will come into force on 27 June 2019. The changes to the legislation are set to impose stricter practice standards for debt agreement administrators and allows the regulator additional investigative power to address misconduct. It also links debt agreement repayments to a specific percentage of the individual’s income and limits the length of a debt agreement proposal to three years, and only in some circumstances, 5 years.
WHAT IS A DEBT AGREEMENT?
A debt agreement is a legally binding agreement between an individual who is insolvent and their creditors, whereby the creditors accept a sum of money the individual can afford to pay. Debt agreements were introduced in 1996 as an option aimed provide a more flexible and socially less stigmatising alternative to bankruptcy. The debt agreement begins with a proposal presented to the creditors that requires the person to negotiate a percentage of their combined debts to be paid over a period of time. The repayments are paid to the debt agreement administrator, and when the payments have been completed, the agreement ends, and creditors are not able to recover any outstanding amounts that were included in the agreement.
Concerns with the current Debt Agreement ARRANGEMENTS
The changes to the current legislation have been proposed because of concerns raised by commentators about existing debt agreements, some of which are described below: –
- Debt agreements are causing harm, particularly to vulnerable people on low incomes;
- Debt agreement administrators are failing to inform people of the full implications of signing a debt agreement or of alternative personal insolvency methods available to them;
- For many low-income people, debt agreements prolong financial hardship while bankruptcy offers immediate relief; and
- Critics have stated that some administrators encourage low-income debtors to enter into agreement which are unsustainable, resulting in continual hardship and inflexibility of repayment plans.
The data shows that since the introduction of debt agreements, the growth rate of this option, when compared to Bankruptcy and Personal Insolvency Agreements, has increased at a significantly fast rate. A table of this growth is depicted below
Personal Insolvencies, Australia 1986-87 to 2016-17
Source: AFSA, “Time Series”, AFSA website and Bills Digest 19 March 2018 NO. 88, 2017-18
Critics have commented that this increase is due to a surge in heavy marketing tactics employed by debt agreement firms and the implementation and incorporation of ‘inappropriate sale techniques’.
WHAT CHANGES HAVE BEEN MADE TO DEBT AGREEMENTS
Some of the most important changes to the debt agreements are: –
- An individual cannot enter into a debt agreement if:
- at the proposed time, the value of the individual’s property that would be divisible amongst creditors if they were bankrupt, is twice a prescribed threshold amount; and/or
- the individual’s payments under the debt agreement, plus a low-income debtor amount in comparison to their taxable income at the beginning of the proposal, exceeds a certain percentage.
- The Official Receiver may refuse to accept a debt agreement if they believe that in complying with the agreement it would cause the individual undue hardship.
- For the purpose of accepting, varying or terminating a debt agreement, creditors who are the administrator of the debt agreement, or a related entity of the administrator, their votes will be disregarded.
- When a debt agreement is made, and any proposals to vary thereafter, must not provide the individual to make payments after 3 years beginning on the day the agreement was made. However, there are conditions which may allow the agreement to be extended to 5 years from the date the agreement was made.
- Before the person signing the certificate in relation to the debt agreement proposal, the person must make reasonable enquiries about the individual’s financial situation and take reasonable steps to verify the individual’s financial situation.
WHAT DO THE CHANGES TO THE DEBT AGREEMENTS HOPE TO ACHIEVE
The number of new debt agreements has almost doubled in the last decade whilst bankruptcies have significantly reduced. The reforms are aimed to ensure that an individual’s debt agreement is guaranteed to be sustainable and are based on an affordable payment scheme. Meaning that debt agreements are not to be excessive in length and more than what the person can afford which results in the prolonging of an individual’s financial hardship. It also hopes to create a more uniformed regulatory framework ensuring greater professionalism in the industry by improving the trust, confidence and integrity in the debt agreement system.
WHAT OTHER OPTIONS ARE THERE OTHER THAN DEBT AGREEMENTS
At Shaw Gidley we agree that debt agreements are at times not the best option available to individuals with insurmountable debts. There are other options which are available to people who are suffering financially: –
- Declaration of Intention to present a debtor’s petition (DOI) – provides a 21-day protection period where unsecured creditors cannot take further action to recover debts. Details of the DOI do not appear on the National Personal Insolvency Index (NPII). The DOI does not make the individual automatically bankrupt, however, creditors are able to use the fact that a DOI has been lodged and apply to the court to make the individual bankrupt.
- Bankruptcy – Bankruptcy stigma is on the decrease and is a viable option for people who are unable to repay their creditors. Bankruptcy brings a definite end to debt problems with creditors dealing exclusively with the bankruptcy trustee. A bankrupt must provide details of debts, income and assets to the trustee who can sell certain assets to help repay debts. If a bankrupt’s income is over a set amount, the bankrupt may need to make compulsory payments to the trustee. A bankruptcy may impose restrictions on employment and overseas travel and appears on the NPII permanently. Currently, a bankrupt will be automatically discharged from bankruptcy in 3 years and 1 day after the filing on the bankruptcy paperwork.
- Personal Insolvency Agreements (PIA) – is also known as a Part X and is a legally binding agreement between the individual and their creditors. The PIA involves the appointment of a trustee to take control of property and make an offer to creditors. The offer may be to pay all or part of debts by instalments or by a lump sum. There are no debt, asset or income limits to be eligible for a PIA and the length of the PIA will depend on negotiations with the trustee and creditors. The PIA will appear on the NPII permanently.
IMPORTANT – DON’T GET PRESSURED INTO ENTERING INTO A DEBT AGREEMENT
If you, or a client, are considering entering into a debt agreement; we ask that you do your research and encourage you, or your client, do one or more of the following: –
- Seek assistance from a financial counsellor and ask for advice based on the entire situation. Their free service can be accessed by calling 1800 007 007;
- Talk to each creditor and ask for financial hardship;
- Talk to a Bankruptcy Trustee, such as one of the trustees at Shaw Gidley, and ask their expert opinion regarding the financial situation. At Shaw Gidley we provide free advice to individuals concerning their circumstances and specialise in providing professional and experienced advice in personal insolvency options available. We have offices located in Newcastle, Port Macquarie and on the Central Coast. For our office numbers and direct contact details please visit our website shawgidley.com.au. As an alternative, you can send an email directly to us at firstname.lastname@example.org
We have been told by many people of the the harm and financial pressure debt agreements are putting on those who are already experiencing insurmountable debts. We hope that the new reforms will change this perception, however, only time will tell.
One thing for certain is that because the debt agreement is a legal binding document, it would be beneficial for any individual considering entering into a debt agreement to get advice from multiple sources, consider the advice and other options available and to consider the implications the debt agreements may have on them not just now but also in the future, before they sign on the dotted line.
If you or a client would like further information, assistance or guidance in relation to personal insolvency options, you can contact us at Shaw Gidley now and talk with an experienced, independent advisor for a confidential and informal discussion in relation to your individual circumstances.
Clare Corrigan is the Manager of the Specialist Personal Insolvency Team at Shaw Gidley. Clare has a wealth of knowledge and expertise in the niche personal insolvency area having nearly a decade of experience focusing on personal insolvency, providing professional but empathetic solutions to individuals subject to financial distress.