Increase in debt agreements a mixed blessing

Personal insolvency activity fell in the year to June 2013, after a flat year in 2011/12.

According to figures released by Insolvency and Trustee Service Australia yesterday, there were 30,822 personal insolvencies in the year to June - down two per cent on the previous year.

Bankruptcies, which make up the bulk of insolvency activity, fell six per cent, from 22,163 in 2011/12 to 20,876 in the year to June.

Personal insolvency agreements were down 24 per cent, while the number of Part IX debt agreements rose by eight per cent, to 9652.

The number of debt agreements has increased steadily since 2007, when changes to the Bankruptcy Act made it easier for people to use them as an alternative to bankruptcy.

The Australian Government has welcomed this development. Earlier this year the then Attorney-General, Nicola Roxon, issued a statement saying: "Debt agreements give many Australians in financial distress an alternative option to get back on their feet sooner than bankruptcy."

A debt agreement allows debtors to provide a plan for paying outstanding debts over a number of years. Lenders may forego some of the debt.

However, this is a controversial area. The Consumer Action Law Centre issued a report this year which criticised the promotion of debt agreements by administrators and credit repair companies.

It said many people who have entered into debt agreements under Part IX of the Bankruptcy Act were unaware of the serious consequences of such a decision.

A Part IX agreement will be listed on a credit report for seven years and is likely to be viewed by creditors as an act of bankruptcy. And if a creditor does not agree to the debtor's proposal it can apply to a court to make the debtor bankrupt.

The debtor's name is also recorded on the National Personal Insolvency Index, which is a public record.

Consumer Action looked at advertising by administrators of debt agreements and found that many businesses appear to overstate the differences between debt agreements and bankruptcy, or to understate the consequences of entering a debt agreement.

It said that in some cases the debtor would be better off going into bankruptcy. If the debtor is below the income threshold required for contributions, bankruptcy may mean that they don't have to pay anything to creditors.

ITSA said in a statement that the most common cause of personal insolvency was unemployment.