As a Registered Trustee in Bankruptcy, I am always intrigued by debtors (or individuals in financial difficulty) who enter into a Debt Agreement under Part IX of the Bankruptcy Act in circumstances where they are likely to be better off financially and non-financially by entering into Voluntary Bankruptcy. In making such statement, I emphasise and realise the importance that each debtor’s circumstances should be viewed on a case by case basis. Equally I continue to be puzzled by those that operate in an unregulated and unlicensed space and continually advise debtors on all manner of options available to them, including Personal Insolvency options for which they are simply unqualified to talk about and end up confusing the debtor.
In analysing some recent statistics released by the Government Regulator, AFSA there are some key observations that can be made about the current state of play. But first, lets dispel some important “urban myths” that I find people have been told or misunderstand:
Myth 1: Bankruptcy affects my ability to obtain further credit whereas a Debt Agreement does not.
This is incorrect.
BOTH Bankruptcy and Debt Agreements will potentially impact the ability of the debtor to obtain further / future credit. This is largely because such appointment will be recorded on the NPII [National Personal Insolvency Index] which is a searchable register. Further, the details may also appear on a credit reporting agency’s records for up to 5 years, or longer in some circumstances.
What is important when dealing with this question is to also look at the context of how much of an issue it will be in either type of Personal Insolvency administration. Sure if the debtor is seeking to borrow almost days after having finished their Bankruptcy (ie automatically discharged) or Debt Agreement, they are the sole borrower, they are requiring a 90% LVR and can only just demonstrate servicing capacity, then YES expect there to be a significant issue with this. However the more time between the finalisation of Personal Insolvency Administration and the finance request when considered with other factors, then it may be something that can be achieved. It will also be dependant on the state of the “non-conforming lending market at the time”.
Myth 2: I am released from my obligations as soon as I enter a Debt Agreement, but I am not in a Bankruptcy.
This is incorrect.
Under BOTH Bankruptcy and Debt Agreements, the debtor is only released from most unsecured debts (ie credit cards, personal loans etc) when they are either automatically discharged from bankruptcy or alternatively the debtor has complied with all their obligations and payments under a Debt Agreement.
Myth 3: It is better for the debtor financially (if they meet the criteria for a Debt Agreement) to enter into same, rather than consider Voluntary Bankruptcy.
This is incorrect.
See the attached link for what is commonly referred to as “indexed amounts” https://www.afsa.gov.au/resources/indexed-amounts . Relevantly, for a debtor to be eligible for a Debt Agreement they must have unsecured debts below approximately $106,560 and after-tax income of $79,920 per annum. For a debtor with no dependants they will not have to pay any compulsory income contributions if their after-tax income is below $53,280 per annum.
Let’s consider an individual that’s accumulated credit card debt [say 5 cards @ $21,000] totalling $105,000 and has after-tax income of $53,000 [which equates to approximately $66,000 per annum and excludes compulsory superannuation]. Let’s also assume that they are renting something for $450 per week, spend a further $400 per week on food / utilities / insurance / motor vehicle costs and finally $150 per week on entertainment. That leaves just a little over $2,000 as a buffer and excludes any provision for even a modest holiday. We also assume that have no material assets, ie investments in shares, property etc.
I have seen examples where debtor’s given the above facts are entering into Debt Agreements and paying almost $10,000 per annum. In the alternate, a Voluntary Bankruptcy in the above scenario would see no amounts required to be compulsorily contributed by the debtor. There is however the opportunity for the debtor to consider making an offer to annul their bankruptcy pursuant to Section 73 of the Bankruptcy Act if they find their circumstances change and there is a benefit to all stakeholders (ie the debtor and creditors) of doing so as it will provide a better return to creditors than in a bankruptcy.
It is critical that debtors GET THE RIGHT ADVICE before making a decision about their financial position. Yes this even includes considering the merits (if applicable) of informal arrangements outside of the Bankruptcy Act. Regrettably, with so much information available to us via the internet, debtors seem to think that they can make a decision based on such information alone. This might be true when we are talking about price comparisons etc and we know the product we are after. However for most debtors it is their 1st touch point in facing personal insolvency. Therefore getting the right advice involves also talking / meeting with a professional that can help assist in properly and carefully evaluating Personal Insolvency Options.
Some Key Observations from the Statistics [expressed Nationally]:
- Total personal insolvencies [29,509] fell 4.3% in 2013-14 compared to 2012-13. Total bankruptcies [18,592] fell almost 11% in the same period. Personal Insolvency Agreements (or Part X’s / PIA’s) represented for under 1% of personal insolvencies during the period. PIA’s continue their overall decline in popularity since the peaks achieved in previous decades.
- For more complex bankruptcies (ie where compulsory income contributions are required to be paid) during the same period the level of contributions collected fell slightly by approximately 1.2% [to $48.24million] which does not appear unreasonable given the reduction in bankruptcies.
- Most recently bankruptcies fell 11.6% percent in the September quarter 2014 compared to the September quarter 2013. Absent of some significant external economic shock, we expect that number of bankruptcies to continue to decrease over the remainder of the 2014-15 financial year and settle at between 17,000 to 17,250 at financial year end.
- Debt agreements can take years until they are fully complied with and completed. As at 30 June 2014, approximately 42% of debt agreements lodged in 2009-10 remained non-completed. Given that most Voluntary Bankruptcies only run for 3 years, this is an aspect that the debtor needs to consider when evaluating options available to them.
A Final Word
Personal Insolvency or Bankruptcy are not dirty words and a lot of people often talk about the “stigma” attached with Bankruptcy in particular. We find that when properly and carefully explained, most debtors understand the stigma may not be anywhere near as significant as they envisaged. This is important because it enables an informed decision to be made by the debtor after carefully weighing up the options available to them.
Whilst bankruptcy numbers have been falling (note Debt Agreements have been increasing), we should remember we have record low interest rates, unemployment levels have been relatively stable and property prices in many postcodes have increased significantly. This all bodes well for the household financial position and has enabled it in many cases to be re-positioned. But cycles do turn and households would do well to regularly review their Net Asset position, with particular reference to reliance on credit card debt and personal loans.
If you find you do get caught out, get the right advice early and speak to myself or one of the other Registered Trustees at Jones Partners.