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The term ‘debt agreement’ is enough to make many brokers run for the hills. In proposing a debt agreement, clients commit an act of bankruptcy – and creditors can use this to apply to court to make the debtor bankrupt if the proposal isn’t accepted by creditors.
Roger Mendelson, CEO of Prushka Fast Debt Recovery, is an outspoken opponent of debt agreements, telling Australian Broker they constitute no more than a bottom-of-the-barrel option for debtors ‘in deep’ and possibly facing legal action.
“Debt agreements are made pursuant to Part IX of the Bankruptcy Act and are recorded on the debtor’s credit file for five years and will be recorded on the ITSA [Insolvency and Trustee Service Australia] data base – which is a public record.”
Furthermore, he argues, the debtor will find it ‘almost impossible’ to get credit during the term of the agreement.
“…For the rest of his life, he will face the question on credit forms ‘have you ever entered into an arrangement pursuant to the Bankruptcy Act?’ He will need to answer this honestly and this will always be a black mark.”
This, however, is where things start to get interesting.
#pb# Malcolm Bartely, director of finance brokerage B Debt Free, says the idea of bankruptcy being the blackest of financial fates is outdated and that the stigma surrounding the term has actually begun to fade.
“When faced with the alternatives, most people accept the idea of being prevented from accessing traditional credit for a number of years. They understand that there are in fact many lenders who will consider lending them more money on the basis that their debt agreement is re-paid in the new funding...The younger generation generally are less concerned about what other people think than the older people in our community.”
Mendelson says the growing popularity of debt agreements (according to the ITSA website, a record 2,510 of debt agreements were recorded in the December quarter, 2012) can largely be attributed to heavy promotion by the likes of Fox Symes.
“It can sound tantalising to someone under pressure. The changes made several years ago which provide that the promoter must get paid on the same basis as other creditors has made a big difference in that they are much less inclined to recommend debt agreements if they think that it has a good chance of falling over.”
But Bartley says the ‘changes’ Mendelson is referring to ‘simply sidestepped’ the regulation by insisting upon upfront fees paid before lodgement and says they’ve in no way reduced the number of debt agreements being processed. Judging by the figures above, he has a point.
Nevertheless, Mendelson maintains that debt agreements are nothing but a ‘quick fix’ for desperate debtors and says visiting an accountant or debt counsellor ‘would probably be much cheaper and has less risk’.
“Breach of a debt agreement constitutes an act of bankruptcy, allowing any creditor to then issue a creditor’s petition to make the debtor bankrupts. If there are only a few creditors, a good first step is to call them and offer to pay by instalments. Most will accept this but will react harshly if the agreement is breached.”
Bartley, for his part, agrees that ‘quick fix’ options are not always the best solutions, but says there's still a valid argument for recommending debt agreements to certain clients.
“Unfortunately, this is what our industry is doing: Quick re-finance to non-conforming, converting unsecured debt to secured and costing astronomically more in interest and fees. A correctly processed debt agreement is not a ‘quick fix’.”
