Bankruptcy petitions ‘overused’

John Kavanagh Consumer lending

A coalition of consumer and community legal groups has called for changes to the way banks, debt collectors, finance companies and the tax office use bankruptcy as an enforcement tool when seeking to recover debts.

Recommendations include improved hardship practices at the Australian Taxation Office, more control by credit providers over how debt is managed after it has been sold, and a tightening of the Australian Collectors and Debt Buyers Association code.

The group has also called for the bankruptcy threshold to be raised from a debt of A$5000 to $50,000. And it wants debtors to have access to free and independent reviews of legal costs.

Financial Counselling Australia, Financial Rights Legal Centre and Consumer Action Law Centre have reviewed applications by creditors in the Federal Court to put debtors into bankruptcy over the past four financial year.

The report was prompted by feedback from financial counsellors and community lawyers, who found that some creditors apply to bankrupt creditors more regularly than others.

In its report, Who is Making Australians Bankrupt?, the group argues that some creditors are overusing the enforcement process.

In the 2018/19 financial year, the Australian Taxation Office made 543 applications.  The number was down on previous years (in 2015/16 the ATO made 1215 applications).

The top three debt collectors applying to make people bankrupt were Lion Finance (512 applications in 2018/19), CCC Financial Solutions (28 applications) and Complete Credit Acquisitions (20 applications). Lion Finance is part of the Collection House group.

“A few debt collectors are regularly and persistently making people bankrupt. This is clearly a deliberate policy decision. Such a decision is inconsistent with a best practice approach to working with people in financial hardship.”

American Express made 119 applications. Its applications have increased over the years.

Another group whose applications have increased is BMW Australia Finance, which made 23 applications in 2018/19 – up from 15 in 2017/18 and 10 in 2016/17.

Among the big four banks, Commonwealth Bank made seven applications, Westpac one, NAB one and none for ANZ.

The review found that there was a significant downward trend in applications for bankruptcy by the big banks. CBA made 46 applications in 2015/16, falling to 24 in 2016/17 and 18 in 2017/18.

Bendigo and Adelaide Bank made 36 applications (down from 63 the previous financial year), Macquarie Bank made seven applications and Bank of Queensland six.

The report says: “Some organisations that engage in debt collection have never or rarely applied to make people bankrupt. This shows that it is possible to run debt collection processes without making people bankrupt.”

The report identifies two general problems with the current system of applying for bankruptcy: it is costly for the debtor, making their situation worse; and a person can be bankrupted for as little as $5000.

“Using bankruptcy as an enforcement mechanism is particularly problematic for people on low incomes who own their homes. It is poor public policy when people become homeless over relatively small debts,” the report says.

It says credit providers have the discretion to specify conditions for how a bad debt is managed when they sell it.

“The original credit provider has an important role in making sure debt collectors are not unfairly aggressive in their enforcement practices. Creditors can, and should, make sure they choose to only sell to debt collectors that have good financial hardship practices and that bankrupt debtors only as a last resort.”

The report calls for the abolition or restriction of debt collection costs and a ban on the recovery of legal costs before court proceedings. And it wants improved access to free and independent reviews of legal costs for debtors.