Debtors will enjoy greater protection under the provisions of a new insolvency law, which cleans up the administration of the controversial part IX and part X debt agreement schemes.
Changes introduced in the Bankruptcy Amendment (Debt Agreement Reform) Act 2018 take effect next week, June 27. They include:
• only registered administrators, the Official Trustee or registered trustees will be able to administer debt agreements;
• administrators will face additional requirements, including a fit and proper test and personal indemnity insurance;
• there are new offences for failure to maintain trust accounts for debtors’ funds and failure to keep records;
• debt agreements can only run for three years
Over the past decade the number of new debt agreements has increased markedly, while the number of bankruptcies has fallen. Debt agreements are seen as a preferred alternative to bankruptcy but they still carry significant obligations.
Critics of the system have long argued that aspects of the debt agreement framework were allowing vulnerable people to be put at risk of entering into agreements that were not affordable.
The Consumer Action Law Centre has long argued that many debtors make a poor choice or are ill-advised when they enter a debt agreement.
The debt agreement process usually involves some of the debt being written off and repayment of the remainder over a term of three to four years. A debtor with significant assets will lose those assets under bankruptcy but can retain them with a debt agreement.
In a submission to Treasury in 2016, CALC said: "A debt agreement is only a superior option for debtors who have an asset to protect. Bankruptcy is a better choice for debtors who have very low incomes and no divisible assets because it clears all unsecured debt without requiring any repayments.
"For many people the fees imposed by debt administrators negate any reduced amount paid out to creditors."
The new law includes protections against debt agreements that cause financial hardship or have other defects. The official receiver can refuse to accept a debt agreement proposal for processing if it believes that complying with the debt agreement would cause undue hardship to the debtor.
It clarifies what debt agreement administrators can claim as expenses and how those expenses can be recovered.
Currently there is no limitation on the timeframe for making payments under a debt agreement. As a result, they may run for longer than five years. This could contribute to unreasonably high repayment rates for low income debtors, and a long debt agreement prevents an insolvent debtor from achieving a fresh start.
Under the new law a debt agreement proposal must not propose to make payments for longer than three years, which aligns with the length of income contributions under bankruptcy.
The reform also includes payment-to-income ratio for debtors, designed to ensure affordability of repayments. There is also an increased asset threshold, which will allow those with increased equity in their homes to have access to the scheme.