Are debt agreement administrators overstating their abilities?

A debt agreement, regulated by the Bankruptcy Act, is an option available to a debtor as a way of dealing with unmanageable debt. Debt agreements typically involve a compromise with creditors on the total amount a debtor will have to repay and set out a timeframe for repayments—but they’re not appropriate for many Australians for whom other options, including bankruptcy, may be more appropriate.

A new report from the Consumer Action Law Centre, Fresh Start or False Hope, looks at websites that promote debt agreement services and expresses concern at the number of businesses that emphasise the benefits of debt agreements, while understating the consequences.

‘Debt agreements certainly have their place; unlike bankruptcy, debt agreements don’t mean that major assets like a family home are necessarily lost. But if the payment plan is unsustainable, it may be causing unnecessary financial stress and other options may be more appropriate,’ said Gerard Brody, CEO of Consumer Action.

‘We’ve looked through a number of websites and, in our opinion, many provide extremely optimistic views about what can be achieved through a debt agreement—including that debt agreements produce “financial freedom”. People facing unmanageable debt are particularly vulnerable and are looking for hope, but giving them unrealistic expectations won’t help matters.

‘The websites that we reviewed often contrasted debt agreements with bankruptcy which is commonly described as having “serious consequences” or being “a last resort”. While there can be serious consequences to bankruptcy, debt agreements and bankruptcy actually share many consequences. For example, both forms of insolvency are listed on an individual’s credit report for seven years. And, for some debtors, entering into a debt agreement can be financially worse than going bankrupt,’ said Mr Brody.

The report raises concerns about debt agreements often being described as “a flexible alternative to bankruptcy”, even by the Insolvency & Trustee Service Australia (ITSA).

‘While ITSA’s website clearly explains the consequences of entering into a debt agreement, not all debt agreement business websites that we reviewed do. While being an “alternative to bankruptcy” may be the policy intent of debt agreements, the phrase does not help consumers make informed choices in their financial interest,’ said Mr Brody.

Consumer Action encourages consumers to consult a free and independent financial counsellor when considering insolvency so they can get unbiased advice. Figures from ITSA show that 88 per cent of people who enter debt agreements get their advice from a debt agreement business, compared to two per cent who speak to an independent financial counsellor.

‘Many Australians go to these businesses for advice when they’re at a real low point, so it’s imperative that they’re given clear and realistic advice. We’re calling on ITSA to play a more active role in ensuring this happens,’ said Mr Brody.

Australians can access free, independent and confidential financial counselling by calling 1800 007 007.