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Restoring five-year terms would help both debtors and creditors, says professional body.
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Debt agreement reform ‘urgent’ as bankruptcies rise
12 September 2022
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9 minute read
Creditors are losing 25c in the dollar due to shorter debt agreements introduced four years ago and with bankruptcies on the rise there is urgent need for reform, an insolvency professional body says.
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The reduction in repayment terms to three years from five had cut debt agreements by “an order of magnitude”, forcing hardship on debtors and short-changing creditors said the Personal Insolvency Professionals Association (PIPA).
Spokesman for the body Ben Paris said the resumption of debt collection by the ATO was forcing more company directors and small businesses to the brink.
“There is an urgent need for debt agreement reform as subcontractors and other sole-traders hurtle off an insolvency cliff,” Mr Paris said.
“There's a lot of subcontractors, for example, who have large debts coming out of COVID, particularly in the construction space, and they really need some kind of a solution to enable them to restructure rather than going bankrupt.”
He said debt agreements, which allowed people to come to a compromise with creditors instead of going bankrupt, were a popular way to deal with insolvency prior to the reduction in terms introduced in 2018.
Mr Paris said this led to a dramatic reduction in debt agreements with both creditors and debtors worse off.
“Before COVID, there were about 10,000 debt agreements a year and now there's about 1,500,” he said. “So you're probably looking at 8,500 people a year being disadvantaged at the moment
“Typically, creditors pre-reform we're getting about 65c on the dollar and now they're getting 40c.”
“The reduction to three years did not strike the balance right between debtors and creditors and it means people have to enter hardship arrangements with creditors.”
With hardship agreements stretching out to seven or even 10 years, many debtors faced debt in perpetuity.
Mr Paris said the Attorney-General’s Department had recently completed consultation on the matter and more than 70 per cent of submissions favoured a return to five-year terms, including those from the Australian Bankers Association, Law Council of Australia and IPA.
“The IPA supports the policy objective of destigmatising business hardship,” group executive advocacy and policy Vicki Stylianou said.
“The legislation should consider including flexibility relating to a repayment program over five years that is desirable by both the debtor and their creditors.”
In addition, 86 per cent of respondents were in favour of excluding debt agreements from a list of triggers that can make someone bankrupt.
“We are hopeful the new Labor government will move urgently forward on this reform, that has overwhelming support,” said PIPA's Ben Paris.
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