A new ball game to stop exploitation.
The Debt Agreement Reform Bill 2018 has now passed the Senate with recommendations.
The aim of the reform was to make the Debt Agreement system more accessible and to "provide greater protection for debtors and creditors". And the Attorney-General, Christian Porter said the reform will, "boost confidence in the professionalism of debt agreement administrators, deter unscrupulous practices and enhance transparency". Our article on the Bill in February explained the implications and our views on how it will affect debtors and creditors alike.
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 reform is centred on changing the eligibility to propose and enter into a debt agreement and change how the payments are calculated. Currently, three main threshold limits (indexed quarterly) 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 $114,478.00.
- A person cannot propose a debt agreement if their divisible property is more than $114,478.00 (e.g. equity in a property)
- A person cannot propose a debt agreement if their after-tax income is more than $85,858.50 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. Also proposed was a new term of three years compared to the current practice of a four- to five-year term.
Our view on the proposed reform was that a fair balance was needed between creditors being able to recoup their loss and debtors having some assurance over financial wellbeing. We highlighted the following elements as being cause for concern and influence how debtors are affected by their choices:
- Some creditors may require a minimum return rate on their debts, which is achievable by increasing the number of payments and why debt agreements are often one or two years longer (at least) than the standard three-year bankruptcy period.
- Life events like an employment loss, unexpected medical expenses or having a baby, can change the ability to make the agreed payment amounts.
- If creditors no longer favour the agreement terms and consequently terminate the debt agreement, debtors are left only to contemplate bankruptcy as a solution.
And it seems that the Senate Committee concurred with our primary concerns.
Their recommendations in passing the Debt Agreement Reform Bill 2018 are:
- Give debtors flexibility to vary their debt agreement up to five years if a substantial and unforeseen change in circumstances is likely to prevent the debt agreement being completed.
- Enable debtors who own or have equity in their principal place of residence to propose a debt agreement term up to five years, and to exempt them from the requirement to comply with the payment-to-income ratio.
- Better target low income debtors with the functionality of the payment-to-income ratio formula.
- Allow debtors to propose payments that exceed the payment-to-income ratio percentage if the source of the funds is viable.
- Amend the Bill's and Bankruptcy Act's offences description and characteristics to ensure consistency with standards in the Criminal Code Act 1995 and the Guide to Framing Commonwealth Offences, Infringement Notices and Enforcement Powers.
- Extend the commencement of the Bill's provisions (most of them) to nine months after Royal Assent.
- Prohibit debtors from administering their own debt agreement.
The new debt agreement legislation is expected to be effective 9 months after it receives Royal Assent.
We urge that professional advisors and debtors to seek the right advice for their circumstances. This advice should come from appropriately qualified specialists. At Worrells, we offer all insolvency services, including debt agreements (Part IXs), personal insolvency agreements (Part Xs), and bankruptcies, therefore we always provide the appropriate advice based on the debtor's circumstances.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.