Yet again, more reform in personal insolvency!
On 14 February 2018, the Bankruptcy Legislation Amendment (Debt Agreement Reform) Bill 2018 was introduced to make the Debt Agreement system more accessible and to “provide greater protection for debtors and creditors”.
A debt agreement also called a Part 9 (under Part IX of the Bankruptcy Act 1966) is when a person (debtor) makes a formal proposal to their creditors to ask them to accept an arrangement that is less than full payment of their debt.
The newly released The Worrells Insolvency Report: 2018 shows that since 2010, bankruptcies as a solution is steadily declining in its use across Australia. The volume of bankruptcies has dropped from 22,163 bankruptcies in 2010-1, to 16,320 in the last financial year (2016-17); equating to 29 percent. Meeting that reduction in bankruptcy figures is an increase of 69 percent in debt agreements over the same period.
According to the 9news article ‘Government seeks bankruptcy alternative reform’, the Attorney-General Christian Porter says the reform is in response to debt agreements being exploited by the debt agreement industry.
“It will boost confidence in the professionalism of debt agreement administrators, deter unscrupulous practices and enhance transparency,” he said.
The reforms are centred on changing the criteria for people to be eligible to propose and enter into a debt agreement, and change how the payments are calculated. Currently, three main threshold limits dictate if a debt agreement is an option for those struggling with personal debt:
- A person cannot propose a debt agreement if their unsecured debts are more than $111,675.20.
- A person cannot propose a debt agreement if their divisible property is more than $111,675.20 (e.g. equity in a property)
- A person cannot propose a debt agreement if their after-tax income is more than $83,756.40 in a 12-month period (following the accepted debt agreement starting).
The reform includes a new payment-to-income ratio for debtors, which is to ensure affordability of the repayments by the debtor, and doubling the asset threshold, which would allow those with that increased equity in homes to access the scheme. The debt agreements under the reform will now be limited to three years compared to the current common practice of four- to five-year term.
To support the reform’s efficiency and to enforce debt agreement administrators to comply, the Attorney-General is also “bolstering the Official Receiver’s authority” over debt agreements being proposed that would cause “undue financial hardship to vulnerable debtors”.
We believe that any reform should provide a fair balance for creditors to take into account their interests to recoup their loss and for debtors to have assurance over their financial wellbeing. At Worrells, we thoroughly explain the effects of all personal insolvency solutions, particularly when considering an agreement against bankruptcy. Several factors influence how debtors are affected by their choices. For example:
- The payment contribution periods under a debt agreement are often one or two years longer (at least) than the standard three-year bankruptcy period. Some creditors may require a minimum return rate on their debts, which is achievable by increasing the number of payments.
- Life events like an employment loss, unexpected medical expenses or having a baby, can change the ability to make the agreed payment amounts.
- If the agreement terms are no longer favourable to creditors and is consequently terminated, debtors are left only to contemplate bankruptcy as a solution.
This reform was introduced to the lower house last month, and is said to be the “first major reform of the Bankruptcy Act 1966 since 2007” and is proposed to be implemented within six months of the legislation being adopted.
We urge that professional advisors and debtors to seek the right advice for their circumstances. This advice should come from appropriately qualified specialists. All too often we hear of debtors seeking advice from organisations that in our view aren’t acting in the best interests of the debtor. At Worrells, we offer all insolvency services, including debt agreements (Part IXs), personal insolvency agreements (Part Xs), and bankruptcy, therefore we always provide the appropriate advice based on the debtor’s circumstances.
Dealing with personal debt: the four options