ITSA profits from the almost bankrupt

The Australian government will slug barely solvent consumers who cannot pay their credit cards debts and other loans $200 to process their debt agreements.

The decision to impose the fee on applicants for debt agreements - an alternative to bankruptcy - and to increase the existing fees on ongoing repayments from 3.5 cents in the dollar repaid to 4 cents, is believed to be a Budget measure, though one not publicised by the Insolvency and Trustee Service of Australia or the Attorney-General's Department.

The fee is non-refundable if the debtor's application for an agreement (which often involves part payment of debts) is rejected by creditors. ITSA will accept payment of the fee by credit card.

A debt agreement is an alternative to bankruptcy favoured by many consumers with credit card, mobile phone, personal and car debts. Debt agreements are also favoured over bankruptcy by some lenders and the government because they deliver more money back to creditors than bankruptcies.

In the last decade a small industry has emerged to promote debt agreements among insolvent consumers, often in concert with debt consolidation loans.

There were more than 2000 debt agreements signed in the three months to March 2010, up six per cent on the December 2009 quarter. Last year, the number of new Part IX debt agreements lifted 30 per cent to 8567.

Reforms to the Bankruptcy Act, now before the Senate, will favour debt agreements over personal bankruptcies for indebted consumers.

Up to forty per cent more stressed debtors will become eligible for part nine debt agreements under the changes.

The Attorney-General, Robert McLelland, said creditors receive 76 cents in the dollar from the average debt agreement, while less than two cents is received from the average bankrupt.

ITSA is believed to currently collect more than three million dollars annually in fees on debt agreements, although this can't be confirmed.