Payment to income ratio
The reforms prevent a debtor from giving the Official Receiver a debt agreement proposal if the total proposed payments under the agreement (over the life of the agreement) exceed the debtor’s yearly after-tax income by a prescribed percentage (the payment to income ratio). Total payments include payments to creditors, the administrator’s remuneration and the realisations charge. A fixed amount, the low income debtor amount is also incorporated into the ratio (illustrated below):
* The Attorney-General can prescribe both the prescribed percentage and the low income debtor amount by legislative instrument. These amounts will be worked out by the Attorney-General’s Department in close consultation with industry groups and stakeholders.
Debt agreement variations must also comply with the payment to income ratio.
The ratio is intended to act as a safeguard for vulnerable debtors while at the same time maintaining the accessibility of the debt agreement system for higher income debtors with a greater capacity to repay their debts.
Note however, that the reforms also provide an option for debtors to propose payments that exceed the payment to income ratio percentage if the source of the debtor’s proposed payments is viable. The proposed debt agreement administrator will be required to certify the viability of such proposals and to be satisfied that the debtor is likely to discharge their obligations under the agreement.
Doubling of the assets threshold
The reforms also broaden the scope of debtors who are eligible to lodge a debt agreement proposal by doubling the assets threshold amount. Currently, a debtor is prevented from giving the Official Receiver a debt agreement proposal if, at the proposal time, the value of the debtor’s property that would be divisible among creditors if the debtor were bankrupt (assets threshold) is more than the threshold amount.
Yes. The reforms prevent a debtor from proposing a debt agreement that would last longer than three years from the day the agreement is made. The rule will also apply to proposals to vary an agreement, so a variation cannot have the effect of extending the timeframe for making payments under the agreement beyond three years from the original agreement date.
If a debtor has not satisfied the obligations created by the agreement three years after the agreement is made, the agreement will continue until it terminates, ends or otherwise concludes under Part IX of the Bankruptcy Act 1966 (the Bankruptcy Act).
However, debtors who own or have equity in their principal place of residence will be able to propose a debt agreement length of up to five years, and these debtors will also be exempt from the requirement to comply with the payment to income ratio (above).
Further, certain debtors will be able to vary their debt agreement to up to five years if they suffer a substantial and unforeseen change in circumstances that is likely to prevent them from completing the debt agreement. If a debtor does vary their debt agreement for this reason, the variation must not increase the total value of payments originally agreed to.
Yes. The reforms provide that the Official Receiver can refuse to accept a debt agreement proposal for processing if the Official Receiver reasonably believes that complying with the debt agreement would cause undue hardship to the debtor.
Under the Bankruptcy Act, an administrator is already required to certify that the debtor is likely to be able to discharge the obligations created by the agreement as and when they fall due. This certification, in addition to the Bill’s new requirement for a debt agreement proposal to satisfy a prescribed payments to income ratio (see above), will already prevent most agreements that would cause the debtor undue hardship. Accordingly, it would only be in exceptional circumstances that the Official Receiver would be called upon to consider whether to exercise this discretion not to send the debt agreement proposal to affected creditors for voting. For example, the Official Receiver may exercise this discretion when facts have been brought to its attention which create a reasonable belief in the mind of the Official Receiver satisfying the requisite statutory standard that the debtor would experience ‘undue hardship’.
This proposed change will also apply to proposals to vary a debt agreement. For both original and varied debt agreements, the power is discretionary and will not require the Official Receiver to review every request.
Yes. Under the reforms, the Official Receiver must not request a vote from an administrator that is an affected creditor, or from a related entity to the administrator. This applies to proposals to enter into, vary or terminate a debt agreement.
A separate amendment in the Bill will make it an offence for an administrator to give, agree, or offer to give an affected creditor an incentive for voting a certain way on a debt agreement proposal, or on a variation or termination proposal.
Other changes include:
- Making registration as a debt agreement administrator mandatory so that only a registered debt agreement administrator, registered trustee or the Official Trustee can administer a debt agreement;
- Expressly prohibiting a debtor from self-administering their own debt agreement;
- Requiring debt agreement administrators to obtain adequate and appropriate professional indemnity and fidelity insurance, similar to the requirements imposed on registered trustees in the Bankruptcy Act;
- Introducing a fit and proper person requirement for registration as a debt agreement administrator;
- Where a variation to an agreement is proposed, requiring the administrator to certify that the debtor is likely to be able to discharge the obligations created by the agreement (as proposed to be varied) as and when they fall due;
- Consistent with the requirements placed on bankruptcy trustees, requiring an administrator to consider whether the debtor has committed any offences under the Bankruptcy Act and, if so, to refer the conduct to the Inspector-General in Bankruptcy or to relevant law enforcement authorities;
- Introducing new offences in relation to the administration of trust accounts and the keeping of proper books to ensure alignment between the bankruptcy and debt agreement offence regimes;
- Amending the description and characteristics of offences contained in the BADAR and the Bankruptcy Act to ensure they are consistent with standards in the Criminal Code Act 1995 and the Guide to Framing Commonwealth Offences, Infringement Notices and Enforcement Powers;
- Allowing the Attorney-General to make legislative instruments for the purposes of determining industry wide conditions for registered debt agreement administrators, to be determined in consultation with industry groups and stakeholders;
- Providing that the Inspector-General’s investigation and inquiry powers extend to any conduct of a registered debt agreement administrator. This amendment will allow the Inspector-General to investigate or inquire into the debt agreement administrator’s conduct during the period starting from when the debt agreement administrator and debtor first engage. It will also allow the Inspector-General to investigate or inquire into any other conduct of a debt agreement administrator, including their advertising practices.
The key reforms in the Bankruptcy Amendment (Debt Agreement Reform) Act 2018 will commence on 27 June 2019 and will apply to debt agreement proposals given to the Official Receiver on or after that date.