Inspector-General Practice Direction 17

IGPD 17 - Guidelines relating to administrators' duty to notify creditors of 3-month arrears default
Date of release: 
February 2010
Last updated: 
June 2019

1. Introduction

1.1 The purpose of this document is to outline the Inspector-General in Bankruptcy’s expectations in relation to a debt agreement administrator’s (DAA) duty to notify creditors that a three month arrears default has occurred, including best practice principles.

1.2 The Bankruptcy Act 1966 (the Act) sets out the legislative framework for a DAA’s duty to notify creditors of a three month arrears default, in particular section 185LB and clauses 3.36 of the Guidelines[1].

2. Practical meaning and elements of duty

What constitutes a three month arrears default?

2.1 A three month arrears default occurs when:

i.  A debtor defaults on one or more payments due by the debtor under the debt agreement;

ii. The debtor does not rectify the arrears when a subsequent payment is due. This will trigger the three month “test time”; and

iii. A three month arrears default will then occur if throughout the three month “test time”, the debtor remained in arrears. The threshold value of the arrears that will trigger a three month arrears notification will depend on when the debt agreement came into force. This is discussed below.

2.2 The three months arrears default occurs on the day immediately after the expiration of the three month period i.e. three months and one day. See practical examples below.

How to measure three months?

2.3 The three month time period is not to be measured or converted to days or weeks. The three month period is only to be measured in calendar months. See practical examples.

2.4 In cases where the last day for making all arrears payments in the three calendar months falls on a Saturday, Sunday or a public holiday the three calendar month period is extended to the next business day.

Notifying creditors

2.5 The expectation of AFSA Regulation and Enforcement (R&E) is for DAAs to keep creditors informed of all material developments with respect to the debtor’s affairs and any event that may impinge on the ability of the debt agreement to continue. The debtor has the option when they fall into arrears to propose a variation and inform creditors of their circumstances and why they should be given more time to pay. There may be valid reasons such as a period of unemployment between jobs or expenses associated with the birth of a child. It is expected that DAAs will take a lead role in business with debtors and creditors in times of default so all parties are aware of the various alternatives to address the situation.

2.6 Consistent with the policy underlying the legislation, creditors should be kept informed of all material developments with respect to an administration. In essence, DAAs are facilitating the contract between the debtor and creditors and must not show bias to either party or their own interests.

Debt agreements commencing before 27 June 2019

2.7 The following is applicable for debt agreements that come into force before 27 June 2019.

2.8 DAAs are required to notify creditors within 10 business days of the default occurring. Notifications to creditors are only required at most once every three months. If there is more than one missed payment in one three month period (i.e. ‘overlapping’), a DAA is not required to notify creditors on the occasion of every missed payment within the three month period.

2.9 It is the time period, not the number of missed payments, which is important. This means that there does not have to be three months’ worth of overdue payments. A default may be as little as $1 if that is the amount of the arrears three months after the payment was due. DAAs are to take the total value of the arrears and circumstances of the debtor into account when preparing the content of their default notice to creditors.

2.10 The clock starts ticking for the three month period when the first default occurs. However, if there is a missed payment that is also made good in the three month period and the total arrears is nil at the end of the three month period, the DAA is not required to notify creditors. The question to be asked is whether the debtor was in arrears for the entire time in a three month period.

2.11 In assessing whether a DAA’s duty to notify creditors has been invoked each three month test period must be reviewed in isolation. In effect each three month period stands on its own. If there have been no missed payments in a particular three month period the DAA is not required to report. Where a payment has been missed that triggers the commencement of the three month test period and if that payment or other missed payments during the period have not been made up by the end of the period, it is expected the DAA will not only report on the amount of arrears for that three month period but also the cumulative total of arrears to that point.

Debt agreements commencing on or after 27 June 2019

2.12 The following is applicable for debt agreements that come into force on or after 27 June 2019.

2.13 A DAA is only required to notify creditors of a default when the amount of arrears is significant, having regard to the value of the payments due and the cost of notifying creditors. The three month arrears default occurs if the amount of arrears at the end of the three month period is over a threshold, either:

  • The total amount that the debtor was in arrears exceeds $300, or 20% of the total of all of the due payments at the beginning of the three month period – whichever is higher; or
  • If the total of all of the due payments was $300 or less, no payment was made in that period to reduce any of the due payments

2.14 Where the arrears over the three month period is over the threshold, but is rectified by the end of the three month period, the DAA is not required to notify creditors. The question to be asked is whether the debtor was in arrears over the threshold for the entire time in a three month period.

2.15 Notifications to creditors must be sent within 10 business days of the default occurring. Notifications to creditors are only required at most once every three months. Where the arrears exceeds the threshold more than once in a three month period, a DAA is not required to notify creditors on the occasion of every missed payment within the three month period.

2.16 In assessing whether a DAA’s duty to notify creditors has been invoked, each three month test period must be reviewed in isolation. In effect each three month period stands on its own. If there have been no missed payments in a particular three month period the DAA is not required to report.

Reporting systems for three month arrears defaults

2.17 The Act requires a DAA to run two different three month arrears notification systems depending on whether a debt agreement is in force before or after 27 June 2019. To ensure no unnecessary regulatory burden is imposed, DAAs may use one notification system for all debt agreements so long as it meets the three month arrears notice requirements of both pre and post 27 June 2018 debt agreements.

2.18 To meet both three month arrears notification requirements, a DAA would send an arrears notification when a debtor has:

  • Defaulted on one or more payments and did not rectify the arrears by the next due payment; and
  • Throughout the three month period was in arrears to any value; and
  • Remained so at the end of the three month period.

This is regardless of when the debt agreement commenced.

The notification letter sent should then clearly state:

i.     The date the debt agreement commenced
ii.    The date of defaulting payment
iii.   The amount of arrears at the end of the three month period following the defaulting payment
iv.   20% of due payments for the three month period
v.    Total due payments for the three month period
vi.   The arrears at the end of the three month period
vii.   The cumulative total of arrears up to the date of the letter
viii.  Information about whether or not the notification letter is considered a formal notice under section 185LB of the Act, for example:

“If the debt agreement commenced prior to 27 June 2019, then this message is to be treated as a 3-month arrears default notice under s185LB of the Bankruptcy Act 1966.

If the debt agreement commenced on or after 27 June 2019:

  • In the event that the total arrears in the 3 months since the defaulting payment is greater than $300, or exceeds 20% of the due payments for the three month period; or
  • In the event that the total due payments at the beginning of the three month period was $300 or less, and no payment was made in that period to reduce any of the due payments, then this message is to be taken as a 3-month arrears default notice under s185LB of the Bankruptcy Act 1966.”

2.19 Further information that a DAA may also refer to in the notification letter include the last payment made by the debtor and any arrangements in place, or to be put in place, for rectifying the arrears. It is assumed that when DAAs only have post 27 June 2019 debt agreements, they will implement a system based only on the new thresholds.

Major and minor defaults

2.20 Whilst having regard to the level and severity of arrears, DAAs are expected to provide creditors with concise information. DAAs may choose to develop precedents which allocate the default as major or minor.

i.  Major – creditors are advised that the debtor is in arrears and DAAs may recommend creditors take appropriate action e.g. debtor was made redundant then skipped without trace and the DAA has learned the debtor has changed bank accounts.
ii. Minor – creditors are advised that the debtor is largely compliant with payments, is only slightly in arrears and DAAs may recommend to creditors that no action be taken e.g. debtor has unexpected car repairs that has meant he has missed one week of payments. All other payments have been made on time and the one week of payments is slowly being made up with extra payments.

Practical examples

Example 1 – 'Major default'

2.21 Mrs A’s debt agreement commenced on 4 September 2017. She has agreed to pay $200 per week over 3 years. Her first payment was due 11 September 2017. Mrs A paid her $200 weekly payments for the first month of her debt agreement but then stopped paying towards the end of October 2017. The DAA referred to their records to discover that the last payment made by Mrs A was on 23 October 2017. Therefore the last payment that was due but that remained unpaid was on 30 October 2017. The last day Mrs A has to pay all accrued arrears and to prevent the three month arrears default occurring is 30 January 2018.

The three month arrears default occurred on 31 January 2018. The DAA carried out their duty to notify creditors of this occurrence within ten business days of 31 January 2018 – this was done on 5 February 2018. The DAA advised creditors that the agreement was $2,800 in arrears and that the debtor has skipped without a trace and to their knowledge it was unlikely that the debtor will bring the arrears up to date. Informed of the debtor’s affairs and the considerable amount of arrears, the creditors resolved to terminate the debt agreement.

Note the relevant dates in this example are:

Date

Event

4 September 2017

Mrs A's debt agreement commences. $200 per week to be paid over 3 years.

11 September 2017

Date first payment due and paid by Mrs A

23 October 2017

Mrs A makes her last payment

30 January 20181

The last day Mrs A has to pay all accrued arrears to prevent the three month arrears default occurring

31 January 2018

3 month arrears default occurs

5 February 2018

DAA notifies creditors of 3 month default within 10 business days

1 - Note this date is not to be calculated from reference to days e.g. 3 months x 30 days in a month = 90 days after 30 July 2016 nor from reference to weeks e.g. 4.3 weeks in a month x 3 months = 13 weeks

Example 2 – Minor default

2.22 Mr B’s debt agreement commenced on 23 April 2016. He is required to pay $100 per week over four years. Mr B’s first payment was due 30 April 2016. Mr B regularly pays his instalments but is paying $95 per week rather than the $100 required. It wasn’t until 29 May 2016 that the DAA discovered that Mr B was making the incorrect payment amount. After being notified, Mr B immediately switched payments to $100 per week and has maintained these since. Despite maintaining the $100 per week payment Mr B has not paid the accrued arrears of $25 from the first five weeks of the debt agreement. The last day Mr B has to pay the accrued arrears of $25 is 30 July 2016.

On 31 July 2016 the three month arrears default occurs. The DAA has a duty to report this three month arrears default to creditors and did so within 10 business days—the DAA did this on 7 August 2016. The DAA advised creditors that the agreement was $25 in arrears and that the debtor had inadvertently paid the wrong amount for the first five weeks but has since paid the correct amount and has agreed to make good the arrears. Informed of the debtor’s affairs and the small amount of arrears that were since brought up to date, creditors resolved to allow the debt agreement continue.

In February 2017, Mr B missed one weekly payment due to personal issues. He missed the payment that was due on 18 February 2017 but then made good these arrears on top of his normal payment on 4 March 2017. All other payments were maintained for the rest of the three month period which began on 18 February 2017. On 19 May 2017 (i.e. three months and one day after 18 February 2017) the DAA is not required to report to creditors as the arrears have been rectified within the three month period.

On 16 June 2018 Mr B paid $50 rather than the required $100 and did not repay this shortfall. The three month arrears default occurs on 17 September 2018 and DAAs are to report to creditors within 10 business days of this date. The DAA contacted the debtor and the debtor immediately paid the $50 arrears amount into the DAA’s trust bank account. In the notification to creditors sent on 19 September 2018, the DAA advised that although the three month arrears default had occurred, the amount was only $50 and this amount had since been paid by Mr B. It was the DAA’s recommendation that the administration continue.

Note the relevant dates in this example are:

Date

Event

23 April 2016 Mr B's debt agreement commences. $100 per week to be paid over four years.

30 April 2016

Date first payment due by Mr B

30 July 20162

Last day Mr B has to pay the accrued arrears of $25

31 July 2016

Three month arrears default occurs

7 August 2016

RDAA notifies creditors of three month arrears default within 10 business days

16 June 2018

Mr B pays $50 rather than the required $100 and is therefore $50 in arrears

17 September 2018

Three month arrears default occurs

19 September 2018

RDAA notifies creditors of three month arrears default within 10 business days

2 - Note this date is not to be calculated from reference to days e.g. 3 months x 30 days in a month = 90 days after 30 July 2016 nor from reference to weeks e.g. 4.3 weeks in a month x 3 months = 13 weeks

Example 3 – Post 27 June 2019 debt agreement

2.23 Ms C’s debt agreement commenced on 24 September 2019. She is required to pay $120 per week over three years. Although Ms C begins the agreement paying $120 per week, from 22 October 2019, Ms C regularly pays $95 per week instead. Despite the DAA informing her that she was accruing arrears, Ms C continues to pay $95 per week. Therefore, the last payment that was due but that remained unpaid would be 22 October 2019. The last day that Ms C has to pay all accrued arrears and to prevent a three month arrears default occurring is at 22 January 2020. Ms C only enters a payment arrangement to rectify her arrears on 28 January 2020, by increasing her payments to $125 per week.

The three month arrears default occurs on 23 January 2020 only if the arrears is the higher of either $300 or 20% of the total of all due payments since the beginning of the three month period.

For the three months preceding the default, the total due payments during this period was $1,680. 20% of this amount would be $336, which would be the applicable threshold as it is over $300.

The total arrears during the three month period was $350. This exceeds the threshold and results in a three month arrears default occurring on 23 January 2020.

The DAA has a duty to report this three month arrears default to creditors and does so within 10 business days—the DAA did this on 30 January 2020. The DAA advised creditors of the arrears and that a payment arrangement was in place. The creditors resolve to allow the debt agreement to continue.

Note the relevant dates in this example are:

Date

Event

24 September 2019

Ms C's debt agreement commences. $120 per week to be paid over three years.

1 October 2019

Date first payment due and paid by Ms C

22 October 2019

Ms C makes payments of $95 per week

22 January 20203

Last day Ms C has to pay the accrued arrears

23 January 2020

Date three month arrears default occurs

30 January 2020

DAA notifies creditors of three month arrears default within 10 business days

3 - Note this date is not to be calculated from reference to days e.g. 3 months x 30 days in a month = 90 days after 19 October 2019 nor from reference to weeks e.g. 4.3 weeks in a month x 3 months = 13 weeks

Example 4 – Post 27 June 2019 debt agreement

2.24 Using the same example above, if Ms C decided to regularly pay $100 per week from 22 October 2019 instead of $95, the total arrears during the three month period would have been $280. Since this amount does not exceed the threshold (i.e. $336), the DAA would not have a duty to report a three month arrears default.

3. Consequences if DAAs breach this duty

Debtors and creditors

3.1 Failing to advise creditors of a three months arrears default leads to delays in informing creditors as to the correct status of the administration. It adversely affects the integrity of the personal insolvency system and could be an indicator that creditors are not being updated. Creditors want to know when the three month default is occurring and have a right to be informed as expeditiously as possible.

DAAs

3.2 We will closely monitor that this duty is carried out appropriately. We will require immediate rectification of any identified breaches. Systemic breaches, especially after our intervention, may lead to one of the remedial actions listed in Inspector-General Practice Statement 9 at paragraph 3.3 being undertaken. This includes disciplinary action.

4. AFSA roles

Regulation and Enforcement

4.1 Section 12 of the Act provides R&E with the power to investigate where there are issues of concern either during the inspection program or through a complaint. We will examine the level and thoroughness of the three month arrears duty being performed by reference to the principles in this practice direction and the legislative framework outlined in paragraph 1.2 above.

4.2 Where breaches of this duty or a lack of record keeping are identified, a DAA will be asked to take appropriate remedial action, including a change in practice. This may also lead to counselling or in serious or systemic cases to either litigation or disciplinary action being initiated which could include conditions being placed on a DAA’s registration.

4.3 During inspections, we will examine the systems and controls a DAA has in place in respect to:

i. the system that will enable accurate identification of three month arrears default
ii.  processes that will ensure creditors are notified of the three month arrears default within 10 business days.

4.4 R&E will examine documented practices and check lists, delegations and, where a DAA is relying on others to assist, how the DAA properly supervises and train their employees, agents or brokers to properly perform these duties on their behalf.

Debt agreement team (DAT)

4.5 DAT is in regular contact with creditors through the annual RDAA forum. DAT will report to R&E when creditors raise concerns about whether three monthly arrears reports are being sent by DAAs. Once advised by DAT, R&E will address the issues with the DAA and, if necessary, ensure appropriate remedial action is undertaken.

5. Conclusion

5.1 This practice direction outlines the Inspector-General’s position and expectations on some of the questions relating to a DAA’s duty to notify creditors of a three month arrears default. It will be against these principles and the legislative framework that a DAA’s performance of this duty will be assessed by R&E.

Footnotes


[1] Guidelines Relating to the Registration and Cancellation of Registration of a Debt Agreement Administrator under the Bankruptcy Act 1966.