Debt management firms have been accused of pushing a form of insolvency aimed at the poor to an all-time high.
New data released by a federal agency on Tuesday revealed that the number of Part IX debt agreements has risen for the 12th year in a row.
Agreements under Part IX of the Bankruptcy Act are widely marketed as “debt solutions” to Australians with mounting credit card or mortgage debt. Only low-wealth individuals can use them.
The number of these agreements increased in the 2015-16 financial year to a total of 12,150 – up 11.3 per cent on the previous year, the Australian Financial Security Authority reported this week.
In 1997-98, the agreements constituted only 1.4 per cent of all personal insolvencies. Today, they account for more than 40 per cent, the highest ratio on record.
Two consumer groups were highly critical of the industry for promoting the agreements, but a senior industry figure denied there were any widespread problems.
Fiona Guthrie, CEO of Financial Counselling Australia, which runs the free National Debt Helpline, said it was “quite concerning” that these for-profit insolvency agreements are heading “ever north”.
“The only option you’ll get offered by these providers will inevitably be very expensive – high upfront costs, high ongoing charges, and not necessarily the best choice,” Ms Guthrie told The New Daily.
“We think half of the people going into debt agreements would be better off with full bankruptcy, or negotiating directly with their creditors.”
A spokesman for the Consumer Action Law Centre blamed the trend on “slick marketing” by “commercial debt vultures”.
“There’s a growing and insidious set of business models in Australia that target people struggling with debt, and profits from their stress and fear,” Consumer Action spokesman Jonathan Brown told The New Daily.
“Debt agreement, credit repair, money management and debt negotiation businesses all have one thing in common – they turn your debt into their profits.
“Australians are carrying a huge amount of personal debt, and these companies have identified this and turned it into a gross opportunity for profit. They’re poorly regulated, they may make people’s financial and personal situations worse and the core of the business model is preying on people living on the edge.”
Mr Brown said debt agreements can be useful if the debtor has an asset to protect. But they should only be considered as a last resort, and only after the indebted person has sought advice from a free, independent and confidential financial counsellor.
“We often find the businesses selling debt agreements do a poor job explaining the consequences. These agreements are a form of bankruptcy, so they must be considered very carefully,” he said.
“Before considering a debt agreement, it’s vital that you exhaust all the options available to you. You may be able to access hardship or concessions from your bank or other providers – they don’t want you to fall further into trouble or default on your loans or mortgage. A financial counsellor is able to help you identify your options and pick the ones that are best for your individual situation.”
But a prominent member of the industry, Clifford Mearns at SRMC Limited, dismissed all of these criticisms.
Part IX agreements are a valuable option for Australians “overburdened with debt” because they are “the only insolvency program that permits a debtor consumer to retain all of their assets, unlike bankruptcy,” Mr Mearns told The New Daily.
He attributed the popularity of the agreements to the poor economic climate, and denied the industry was under-regulated or acting in a predatory manner. “The purpose of the legislation is being met as was originally intended. That is to provide a consumer, insolvent and distressed by debt to seek relief without turning to bankruptcy.”
He also denied that fees are onerous. “Other than seeking out of pocket expenses prior to lodgement of documents with AFSA, the balance of service fees are included into the debt agreement, to be settled proportionately over the life of the debt agreement, which may be a period of between 3-5 years.”
The Australian Securities and Investment Commission (ASIC) released a report in 2016 that was highly critical of debt management firms.