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Review of Debt Agreements under the Bankruptcy Act 1966

28 April 2010

Mr David Bergman
Assistant Secretary
Bankruptcy Policy Branch
Attorney-General’s Department 3-5 National Circuit
BARTON ACT 2600

Dear Mr Bergman

Review of Debt Agreements under the Bankruptcy Act 1966

The Debt Agreement Practitioners Association (DAPA) supports the review of the effectiveness of the debt agreement system and appreciates the opportunity to be a participant in the Bankruptcy Reform Consultative Forum.
DAPA has reviewed the Issues Paper released by the Attorney-General’s Department and makes the following submissions in respect of what DAPA sees as the significant issues that should be incorporated in the scope of the review.

1. Relationship between debt agreements and a debtor’s credit rating / NPII

   DAPA believes that it is essential for a clear distinction to be made between formal arrangements (such as Debt Agreements and Personal Insolvency Agreements) and Bankruptcy. Accordingly, DAPA submits that upon completion of a Debt Agreement, the debtor’s credit file should be restored to clear all defaults registered prior to entering into the Debt Agreement. Once the debtor’s Debt Agreement has been successfully completed, it should be removed from the debtor’s credit file. The listing on the NPII should only be recorded if the Debt Agreement is terminated.

2. The restriction of entering into a Debt Agreement if a debtor has been bankrupt or Debt Agreement in the last 10 years

   DAPA believes that this restriction should be withdrawn and discretion be given to the Official Receiver to refuse to process a Debt Agreement if grounds have been established that the debtor is solvent or the debtor has intentionally incurred debt with no intention to repay it in full.

3. Increased education of debtors considering about all available options

   DAPA supports the enhanced education and literacy themes included in recent amendments to the Bankruptcy Act. DAPA is of the view that more can be done to provide debtors with the tools necessary to develop a better understanding of their financial situation and re-enter the credit marketplace effectively. Accordingly, DAPA submits that a mandatory debtor education regime be legislated similar to that which has gained success in the United States.Under this regime, a debtor who proposes to file a Debtors’ Petition would be required to complete an online assessment so they can enhance their understanding of the alternatives to Bankruptcy. This online assessment would become mandatory before a Debtors’ Petition is accepted by the Official Receiver. An appropriate professional (registered debt counselling officer, Registered Debt Agreement Administrator (RDAA) or Registered Trustee) would be required to authenticate a certificate stating that the debtor has completed the on-line assessment and has an understanding of options available to avoid bankruptcy.

4. Three month default reporting is not an appropriate reporting mechanism

   DAPA believes that the current method of default calculation is too complex and onerous upon RDAA’s.DAPA submits that this reporting function should be abolished and replaced with a six monthly report of receipts and payments (see discussion below). However, if it is determined that the current three month default reporting is effective (following industry feedback), then DAPA submits that the timeframe for issuance of the statutory notice be extended to no earlier than 28 days following the statutory default.

5. Six monthly dividends and accompanying reports

   To increase the effectiveness of the Debt Agreement system, DAPA submits that the legislation should specify that dividends be distributed twice yearly and this requirement be coupled with an obligation to lodge with ITSA a report outlining six monthly receipts and payments. To increase consistency and timeliness of reporting, DAPA recommends that ITSA be obliged to electronically distribute the report to creditors (in a report format to be agreed with creditors). DAPA recognizes this may also assist ITSA in the compilation of the yearly AER.It is proposed that the six monthly receipts and payments report incorporate a debtor’s contribution schedule (which will show contributions due, contributions paid and any arrears).

   The six monthly report of receipts and payments would become mandatory (regardless of whether contributions have been made or not in the six month period).

6. Official Receiver’s discretion to override dissenting creditor vote

   DAPA is concerned with voting practices and it is evident that certain creditors have no regard for the debtor’s “capacity to pay” and instead vote based on pre- determined policies based on a “desired rate of return”.

   DAPA submits that the Official Receiver (or a delegate of the Inspector General) be empowered with the discretionary power to override any dissenting vote for either a fresh proposal or a variation. The right to apply for this discretion to be exercised should be afforded to the debtor and the nominated RDAA in prescribed circumstances and must be made within 21 days of the voting outcome being promulgated by ITSA.

   The Official Receiver could be directed to exercise the discretion to override the dissenting vote if the following grounds are established:

   • the proposal offers a return to creditors which is greater than the estimated return under bankruptcy (the RDAA must provide this information to ITSA in the application); and
   • the Official Receiver is satisfied that strict compliance with the obligations set out under the Bankruptcy Act have been followed in formulating the proposal; and
   • the application is made within 21 days of the voting outcome being promulgated by ITSA.
7. Brokers be regulated to increase the integrity of the system

   All industry stakeholders are cognisant that there needs to be greater regulation of brokers who provide information and advice relating to debt agreements. DAPA is of the view that ‘brokers’ (defined as corporate entities or individuals) must be licensed to provide any insolvency advice to debtors including: bankruptcy; formal alternatives to bankruptcy and also informal debt repayment plans (presently unregulated).

8. Set up fees be restricted to a prescribed level (and then indexed with CPI)

   The amount of money paid by debtors through the Debt Agreement system has continued to increase. The percentage of that money which has been paid to creditors has increased dramatically whilst the amount paid to RDAAs has decreased despite the increased certification duties and reporting obligations of the RDAAs (see graph provided in the Issues Paper). This statistic is unsustainable as RDAAs are unable to recover significant costs (such as advertising and general overheads) required to provide upfront insolvency services. If this trend continues RDAAs may financially fail.DAPA submits that, at the time of proposal acceptance, any residual unpaid set up fees should be afforded full priority before any dividends become payable to creditors. This will ensure that RDAAs are afforded the same entitlement as other insolvency practitioners (Registered Trustees and Liquidators) who provide similar services.

9. Transfer of debt to be notified

   To improve the information flow and veracity of information held by RDAAs, DAPA submits that creditors and debt purchasers should become liable to register any transfer of debt with ITSA within 14 days of the assignment.

   As discussed at the recent RDAA Professional Development day, S.12 of the Conveyancing Act is very specific about absolute assignment, of which many creditors are failing to adhere to. It is therefore paramount that the creditors discharge these duties to assist RDAAs in discharging their duties by paying dividends to the correct creditors.ITSA could then provide the data to the relevant RDAA with full details on each debt that has been assigned (including name of debtor, date of transfer). If any dividends are paid to the originating creditor, then the originating creditor should be legally bound to pay the debt purchaser any dividends received after the assignment within 28 days of receipt.

   Should you have any queries in regard to this submission, please contact Anthony Warner, our Chairman of the DAPA Law Reform Committee by telephone on 02 8243 5220 or by email to anthonywarner@dapa.org.au.

Yours sincerely

DAPA Executive

Download Original Extract of Bankruptcy Reform Consultative Forum submission April 2010 PDF

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