House of Representatives

Bankruptcy Amendment (Debt Agreement Reform) Bill 2018

Second Reading Speech

Senator FIERRAVANTI-WELLS (New South Wales-Minister for International Development and the Pacific)

I table revised explanatory memoranda relating to the Communications Legislation Amendment (Deregulation and Other Measures) Bill 2018 and the Treasury Laws Amendment (National Housing and Homelessness Agreement) Bill 2018 and move:

That these bills be now read a second time.

I seek leave to have the second reading speeches incorporated in Hansard.

Leave granted.

The speeches read as follows-

This Bill amends the Bankruptcy Act 1966 to comprehensively reform Australia's debt agreement system.

It will boost confidence in the professionalism of debt agreement administrators, deter unscrupulous practices and enhance transparency. This Bill will ensure that the debt agreement system is accessible to debtors who have the financial capacity to enter into debt agreements.

Debt agreements are a statutory alternative to bankruptcy for eligible insolvent debtors. They provide a viable solution for managing personal debt. Debtors can regain and maintain control over their personal affairs and creditors can receive a portion of what they are owed.

[Modernising the debt agreement]

This Bill is the first major reform of the debt agreement system since 2007. The amendments include measures to modernise debt agreements to suit today's financial environment.

In light of the increasing value of Australia's property market, we are doubling the asset threshold at which debtors can access the debt agreement system. The higher threshold will open the system to debtors with some equity in their family home. However, the system also requires appropriate safeguards.

[Appropriate safeguards for debtors]

Under current arrangements, debt agreements can be proposed or extended to well beyond the five year mark. In some cases, they can extend beyond seven years. Longer debt agreements and subsequent variation of debt agreements is a sign that a debtor is unable to meet or maintain their obligations under the agreement.

This Bill will now require debt agreement proposals to include a payment timeframe that is three years or less. This measure will allow debtors to manage their debts in the short term and work towards a fresh start.

Despite the benefits of the debt agreement system to both debtors and creditors, a minority of debt agreements propose to pay amounts which significantly exceed the debtor's income, imposing substantial financial stress on the debtor and their families. This is a contributing factor to the repeated variations and extensions to debt agreements that the existing scheme permits, keeping debtors in financial stress for longer periods.

This Bill will address this concerning issue in a number of ways:

Firstly, we are introducing the innovative concept of a payment to income ratio - which will ensure proposals to set up or vary a debt agreement include an affordable payment schedule, whereby the total payments to be made do not exceed the debtor's income by a prescribed percentage.

To ensure the ratio is balanced and suited to the market, it will be determined by legislative instrument in close consultation with the debt agreement industry, consumer advocacy groups and creditor representatives.

Secondly, we are bolstering the authority of the Official Receiver in Bankruptcy to intervene in exceptional cases and refuse to accept debt agreement proposals which would cause undue financial hardship to vulnerable debtors.

The reforms will also deter unscrupulous practices of a small minority of debt agreement administrators, by setting stricter practice standards, introducing tougher penalties for wrongdoing, and granting the Inspector-General in Bankruptcy additional investigative powers to address administrator misconduct.

To mitigate the risk to a debtor of debt agreement administrator error or malpractice, we are now requiring administrators to take out and maintain professional indemnity and fidelity insurance as a requirement of their registration.

This brings requirements for debt agreement administrators into line with registered trustees and provides a safety net for affected debtors and creditors.

[Debt agreement administrators]

Debt agreements should be administered by appropriately skilled people to achieve the best outcomes for both debtors and their unsecured creditors.

To boost confidence in the professionalism of the system, this Bill introduces a requirement that only those who meet enhanced registration benchmarks will be eligible to administer a debt agreement.

An unregistered administrator will have 12 months from Royal Assent to the Bill to register as a debt agreement administrator or trustee if they wish to keep administering debt agreements.

The Bill also enhances transparency, providing clarity to debtors and creditors about an administrator's financial and organisational arrangements.

It is essential that debtors and creditors have the opportunity to review any business practices of an administrator that might affect a debt agreement - for example, the administrator's expenses arrangements or any relationships with debt management brokers or referrers that an administrator may have.

Requiring administrators to disclose their relationships is important because any money paid to brokers or referrers is money that could have been paid to creditors.

These amendments provide that a debt agreement proposal must disclose any relationships between administrators and brokers, and detail the types of expenses the administrator can recover, allowing debtors and creditors to make informed choices in proposing or accepting a debt agreement.

The enhanced standards for debt agreement administrators will be further enhanced by the development of industry wide conditions, to be implemented by legislative instrument in conjunction with this Bill.

These conditions will be developed in close consultation with the debt agreement administrator industry, consumer advocacy groups and creditor representatives.

As a whole, these measures will ensure the debt agreement system is an effective, fair and functional debt management option for debtors and creditors alike.

The Bill will commence six months after Royal Assent, giving the debt agreement administrator industry enough time to prepare for the changes.

These long-awaited reforms will revitalise the debt agreement system, providing better outcomes for creditors and supporting Australians living in financial distress to control their personal affairs.