Practitioners: COVID-19 and changes to debt agreements

Due to the disruption caused by COVID- 19 the Inspector-General has decided to temporarily alter his expectations with respect to Debt Agreement Administrators’ certification duties when debt agreements are proposed to be varied. The previous expectations are set out in Inspector-General Practice Direction 13 (IGPD13). This document can be taken to displace IGPD13 but only to the extent that they differ. The expected time frame for the altered expectations is six months (until 30 September 2020) unless otherwise advised.

For debt agreements proposed before 27 June 2019, variation proposals do not require certification. Administrators should take a common sense approach in dealing with such proposals and guidance given to the debtor at the time as to their options, especially taking into account affordability and whether the debtor is likely to be able to discharge their obligations.

The Bankruptcy Amendment (Debt Agreement Reform) Act 2018 (Cth) introduced additional certification duties for DAAs with respect to varying debt agreements. The changes apply only to debt agreements proposed on or after 27 June 2019 and are as follows:

1. Administrators must certify that they have reasonable grounds to believe that the debtor will be able to discharge the obligations under the varied agreement as and when they fall due (“affordability certification”).

2. Additionally, if the variation will have the result of extending the debt agreement beyond three years, (any period up to a maximum of five years) administrators must also make certifications that they have reasonable grounds to believe that the debtor has suffered a substantial change in circumstances not foreseen at the time of the DAP and that the proposal does not increase the total of the payments that the debtor would be required to make under the agreement.

We acknowledge that the strength of the administrator’s certification can realistically only be as strong as the amount of certainty presently existing in the economy and the job market. Therefore the general thrust of the changes will be a temporary lessening of the Inspector-General’s expectations. Debtors should be afforded an opportunity to remain in a debt agreement for as long as possible (if they desire to) and should not be unduly disadvantaged by this uncertainty, and the consequent difficulties this places on administrators complying with their duties. This broad approach is in keeping with the Government’s recently announced temporary changes to the Bankruptcy Act, i.e. a temporary reprieve. These changes, in place until 25 September 2020, include an increase in the threshold for a creditor to apply for a bankruptcy notice from $5,000 to $20,000 and an increase from 21 days to six months in both the timeframe for a debtor to respond to a bankruptcy notice and the protection from enforcement action by creditors for debtors who apply for Temporary Debt Protection with AFSA.

Affordability certification [Section 185M(1F)]

If a debtor has lost their job due to the COVID- 19 disruption, been put on reduced hours or has been stood down temporarily, the likely variation proposals will vary with their individual circumstances and may include one of the following:

  • Ask creditors to accept reduced payments
  • Ask creditors to approve the debt agreement being extended for a period to allow the debtor a suspension of payments, or
  • Especially if the debtor has made the majority of payments due under a debt agreement, ask creditors to accept the payments made to date in full satisfaction.

If the variation is of the second type, the suspension type, administrators should at least turn their mind to the future employment prospects of the debtor – for example, if the debtor has been stood down from employment rather than actually being terminated, the debtor’s age, the debtor’s skills and training, the debtor’s family situation etc and briefly document these considerations.

Extension certification [Section 185M(1DB)]

If the debtor loses their job or their circumstances otherwise materially change due to the disruption caused by COVID- 19 this will, by itself, constitute the requisite substantial, unforeseen changes in the debtor’s circumstances that are needed to extend a debt agreement from three to up to five years.

Documentation

We understand that it will be considerably more difficult for administrators to document their decisions, so we are content for administrators to rely more than in the past on phone calls and accompanying file notes. However there should in most cases be some written evidence of the temporary or permanent loss of employment such as an email, letter, or sms message which should be sighted by the administrator. Files notes of such decisions made by administrators must be made and retained.

Bankruptcy

We expect administrators to remind debtors that bankruptcy is an option open to debtors in financial distress, and may provide the most immediate and long lasting relief from financial distress.

For more information about our recent legislative changes see: Coronavirus and changes to bankruptcy laws