The Bankruptcy Amendment (Debt Agreement Reform) Act 2018 (Cth) was designed to and is already having a major impact on the debt administration industry in Australia following its commencement on 27 June 2019.
The aim of the legislation is to tighten up regulation of the debt administration industry and place additional restrictions on such agreements, including limiting the duration of any agreement to a maximum term of 3 years.
Until now, debt administration agreements entered into under Part IX of the Bankruptcy Act 1966 (Cth) have proved an effective way for debtors to deal with unmanageable debt burdens. Between 2007 and 2016, new debt agreements increased from 6,560 to 12,640 per year. Over the same period, new bankruptcies declined from 25,754 to 16,842 per year.
It is therefore surprising that the recently implemented reforms have not attracted more attention. Part of the reason for this is probably that these reforms have taken so long to come to fruition and that most updates concerning these reforms were written back in 2018.
However since the legislation commenced, many of our clients have noticed that there has been a move away from formal Part IX debt administration arrangements and a significant number of “informal debt agreements” are now being proposed.
Registered Debt Administrators (or their related corporations) who hold a credit licence authorising them to provide “credit assistance” can readily to avail themselves of this option and effectively bypass the new reforms.
The changes seem make such agreements less profitable for debt administrators and make it more difficult to make proposals acceptable to creditors when the maximum term of an agreement is now only 3 years.
The maximum 3 year term of a debt agreement brings them into line with the period of bankruptcy which is also 3 years.
What then are the changes recently implemented?
The explanatory memorandum explains the intent to the legislation in these terms:
The Bill will effect a comprehensive reform of Australia’s debt agreement system. ………….
Significant measures in the Bill make provision for:
- the types of practitioners authorised to be debt agreement administrators
- registration, deregistration and the obligations of debt agreement administrators
- formation, administration, variation and termination of debt agreements
- protections against debt agreements that cause financial hardship or have other defects, and
- powers of the Inspector-General in Bankruptcy (Inspector-General) with respect to debt agreements and debt agreement administrators.
It is intended that the measures in the Bill will boost confidence in the professionalism of administrators, deter unscrupulous practices, enhance transparency between the administrator and stakeholders, and ensure that the debt agreement system is accessible and equitable.
Some of the more significant reforms include:
|Nature of reform||More Details|
|length of debt agreements||Maximum three years,
Except where debtor owns and has equity in real property, in which case, maximum 5 years.
Ability to extend existing debt agreements up to 5 years if debtor circumstances deteriorate
|Impose maximum payment to income ratio||This ratio has not yet been prescribed.
The reforms are designed to prevent a debtor from giving the Official Receiver a debt agreement proposal if the total proposed payments under the agreement exceed the debtor’s yearly after-tax income by a prescribed percentage (the payment to income ratio)
|Asset Threshold||The reforms double the maximum asset threshold – now currently $231,467.00 as at 27 June 2019 (note that debt threshold is currently $115,733.80)|
|Reimbursement of expenses||Greater transparency around seeking reimbursement of expenses|
|Proposals to vary debt agreements||Administrator has duty to ensure that certificate to vary debt agreement is correct.|
|Undue hardship to debtor||Official Receiver can refuse to accept an agreement proposal if they reasonably believe that complying with the agreement would cause undue hardship;|
|Voting by related parties prohibited||Often debt administrators are related to credit providers. Related credit providers will not be allowed to vote on proposal made|
|Insurance||Debt Administrators required to obtain and maintain adequate and appropriate professional indemnity and fidelity insurance;
|Disclose Relationships||Debt Administrators required to disclose details of any broker or referrer relationships, including details of payments made;|
These reforms have the potential to reshape the debt administration industry. It will be interesting to review how the changes have impacted the industry after the reforms have been in place for 12 months.