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Legal and Constitutional Affairs Legislation Committee

COX, Ms Karen, Coodinator, Financial Rights Legal Centre

NEWTON, Ms Cat, Policy Officer, Consumer Action Law Centre


CHAIR: Welcome. I understand that you've been given information on parliamentary privilege and protection of witnesses. If either of you did want to take any questions in camera you should raise that with the committee. Of course, it's a breach of Senate rules for anyone to be in any way disadvantaged by evidence they give at Senate committees. Thank you very much, both of you, for coming along. We ask that you give an opening statement and then we will put some questions to you.

Ms Cox : Thank you for the opportunity to share our views today on the two bankruptcy amendment bills. The Financial Rights Legal Centre and the Consumer Action Law Centre, and Financial Counselling Australia, who couldn't be here today, have provided joint submissions to the committee on both bills. Our organisations have extensive experience in providing independent advice and support to Australians with unmanageable debt. This includes advice on bankruptcy, part IX debt agreements and other options to resolve money and debt problems. Both our services run the National Debt Helpline in Victoria and New South Wales. It operates in a different organisation in every state, and I would say that between us we speak to somewhere between 30,000 and 40,000 consumers in financial trouble every year. We have a lot of contact with those people and, because we are largely government funded community services, we don't take fees for those services, so we have a fairly independent overview.

CHAIR: How are you funded, if I might interrupt?

Ms Cox : That's very complex. Through Attorney-General's partially, Fair Trading in New South Wales, I think—

Ms Newton : Consumer Affairs Victoria and in Victoria through the national CLC partnership, and we have some other sources as well.

Ms Cox : The Department of Social Services, ASIC enforcement activity in recent years—a number of different sources of funding.

CHAIR: So you get a little bit from everyone?

Ms Cox : Yes—a little bit from lots.

CHAIR: And the same would apply in all states?

Ms Cox : Yes. There's a slightly different picture in every state but there is a version of a national debt helpline in every state.

CHAIR: Is the 40,000 you mentioned just you two, or is that across Australia?

Ms Cox : We alone speak to somewhere between 16,000 and 17,000.

Ms Newton : I can take that on notice. I don't have exact figures. I think that's right.

Ms Cox : I'm pretty sure it's in excess of 10,000 and possibly closer to 15,000 or 16,000 in Victoria as well.

CHAIR: Sorry; I've interrupted you.

Ms Cox : That's okay. I'll turn first to the enterprise incentives bill. We support the reduction of the default bankruptcy period to one year but allowing the income contributions to continue for three. We believe that this strikes an appropriate balance between the interests of creditors and ensuring that bankruptcy provides a fresh start for debtors and is not needlessly punitive. Having listened to the previous session, I'd also like to add that, whereas we do not specialise in business in any way, we inevitably get calls from many small business operators in their personal capacity because they're struggling with debt. I'd like to emphasise that they come off on both sides of the equation: creditors are also debtors and often both. It just takes one large creditor to go under for everyone to get knocked down. So I think that they're both going to get the benefits of this bill as well as, hopefully, the protections that have been preserved for creditors.

The intention of the bill is to reduce the stigma of bankruptcy and to encourage entrepreneurial activity. We think the bill has little chance of achieving this goal unless there is also a reduction in the time that a bankruptcy appears on credit reports. It's often the credit report that will prohibit access to credit in future, and there's no proposal on the table to reduce the period that a bankruptcy stays on the credit report. It will stay for the same period.

CHAIR: What's the current situation?

Ms Cox : Five years. It stays on the National Personal Insolvency Index forever, but it's on the credit report for five years.

CHAIR: Sorry; what did you say about forever?

Ms Cox : The National Personal Insolvency Index preserves bankruptcy records forever, so, if someone really wanted to find out and they could pay to do so and searched that register, they could know. But it remains on your credit report, which is what is routinely searched by creditors when you apply for credit.

The main point we wanted to make in relation to the bankruptcy bill was simply that, while ever that remains the case, you would have to also reduce the retention period for a standard default if you were to reduce the period for bankruptcy, but both could be done via an amendment to the Privacy Act.

CHAIR: So what are you suggesting the credit reporting times should be reduced to?

Ms Cox : I think it should be possibly either three years from the beginning or two years from the end. In that way, if the bankruptcy were extended for any reason, so would be the period that it was retained for.

That concludes our comments on the enterprise bill. Our interest is actually in the debt agreements proposals. We see a lot of debt agreements. We have a lot of concerns about debt agreements. I'm going to hand over to Cat Newton to talk about debt agreements.

Ms Newton : Good morning. Thank you for the opportunity to appear today. I turn now to the debt agreement reform bill. We strongly support the comprehensive reforms to the debt agreement regime that are in this bill. All too often our lawyers and financial counsellors are left to clean up the mess when somebody's coming out of a failed debt agreement. Our joint submission on the exposure draft shares the experience of seven Australians who've been dudded by their registered debt agreement administrator or by an aligned broker. Take Marie. When she entered a debt agreement on the advice of a registered administrator, she was 64 and in poor health. She lived in a regional area with high unemployment, and her sole income was from Newstart. She intended to retire when she qualified for the age pension in two months time. On her administrator's own calculations, Marie had only $40 available per week to put towards repayments on the debt agreement. Despite this, the proposal that her administrator prepared saw weekly repayments increase from $32 in the first year to a whopping $200 per week in the final four years. It was clearly unaffordable for Marie, but, as for the administrator, they stood to earn fees of nearly $8½ thousand. Or take Jamila, who thought it was a form of debt—

CHAIR: Sorry to interrupt. We can come back to that spot. What was the debt in that case? Was the $8½ thousand fees?

Ms Newton : I'd have to take that on notice to get the exact amounts of debt.

CHAIR: Probably the debt was only $10,000.

Ms Newton : I have a number of case studies. I might take that on notice and come back to that so I can provide the precise details.

CHAIR: All right.

Ms Newton : The administration fees were very high in that case. They're typically a percentage of every repayment, so they would have been in proportion to the debts.

Another example we have in our submission is Narelle, who was told that her debt agreement would have fees in the amount of about $1,800, but, when the proposal actually arrived in the mail some time later, she was shocked to find an additional $8,000 in administration fees.

There is Marco, who was then aged 75 and living at a friend's house and struggling with the loss of his wife. A registered administrator collected fortnightly payments from his age pension for six months before telling him that actually he couldn't afford a debt agreement and that he should go bankrupt instead. In fact, Marco didn't need a debt agreement or bankruptcy, as his financial counsellor ultimately negotiated a waiver of his credit card debts, for free.

Take Jen, a young mum who was supporting her partner and child financially. Jen says that, on the advice of her registered administrator, she stopped making payments towards her car loan and her personal loan and started paying the administrator instead. Jen says that this advice, 'ruined her financial situation more than anything,' because, when her debt agreement proposal ultimately wasn't accepted, she couldn't catch up on the arrears to her lenders. She says that her bank gave her 28 days notice to pay the arrears in full and then made a default listing on her credit report.

In our experience, these stories—stories of people who are trying to do the right thing, who are trying to get on top of their debt, only to be ripped off by the company that promised to help—are the rule and not the exception when it comes to debt agreements.

The statistics and academic research reflect our casework experience. We see patently unsuitable debt agreements, inappropriate eligibility thresholds, misleading advertising, and poorly informed or misled debtors who didn't understand the true cost or the serious consequences of entering this form of insolvency. Even when an administrator or a broker breaches the law, there are very few practical remedies for Australians to get their money back and be put in the situation they would have been in if not for the misconduct.

Although it's heavily advertised as a form of debt relief, 64 per cent of people in a debt agreement are in fact repaying more than the initial debts that they were originally struggling to repay.

CHAIR: Well, they're paying the original debt plus the fees.

Ms Newton : That's right.


Ms Newton : So, while there may be a reduction in the debt that has been negotiated with the creditors—perhaps you're paying 70c in the dollar to your creditors—the fees to the administrator and realisations to the government actually put the cost of the repayments over your debt amount. That is also exacerbated by the increasing length of agreements.

Senator PRATT: Will this bill fix that?

Ms Newton : To a certain extent. We have made some recommendations around fees; we think that they're excessive and unwarranted, and we would like to see some further reform on fees to administrators. But, certainly, some of the reforms—the three-year reform and the payment-to-income ratio—will go some way towards making these debt agreements more affordable. It goes without saying that it's not really in the debtor's interests or the creditors' interests for anyone to be repaying more than the original debt, with a chunk just going to, effectively, a middleman.

Given the many problems, we strongly support the reforms in the bill. We do think there are some technical amendments that are required, and we have detailed these in our submission. In our view, there are three critical reforms that are outstanding.

The first is that we think that all registered administrators and their brokers should be required to offer external dispute resolution through the new Australian Financial Complaints Authority. While there are some expanded provisions in the bill to allow people to void their debt agreement, courts aren't always an easy avenue for people, particularly people coming out of a failed debt agreement who might ultimately go bankrupt. There are some restrictions about whether you can initiate legal action as a bankrupt.

Senator MOLAN: Sorry, can you say that again, please?

Ms Newton : If a debt agreement has failed—perhaps because there has been a breach of the certification requirements by the administrator and they haven't been able to meet their obligations, and it is terminated due to arrears—some people may end up going bankrupt. But, once you're a bankrupt, you actually need your trustee's permission to initiate court action. It's not so easy for somebody to walk off to court and take action against their administrator once they're in that situation. By comparison, the Australian Financial Complaints Authority is a free service, it will be more accessible and you don't necessarily need a lawyer to go there. We think it will be a lot easier for people to access that service, as opposed to a court, in some circumstances.

All lenders must be part of that scheme. People who are offering debt consolidation or financial advice, which tends to have a lot of overlap with the types of services that administrators provide, must maintain membership of AFCA. We don't think that administrators should be getting any special treatment.

The second critical reform we'd like to see added to this bill is the introduction of minimum eligibility thresholds. We think that this would be one of the most effective reforms to make sure that debt agreements, as a form of insolvency, are properly targeted at people who genuinely need one and can actually benefit from this option over the other options to deal with unmanageable debts.

Thirdly, we'd like to see the introduction of a statement of suitability to ensure that the debt agreement that's drafted and arranged by administrators is actually suitable and appropriate to the debtor's circumstances and capacity to repay. Given that if you fail in your debt agreement all of the benefits are undone and all of the fees that you've paid to the administrator aren't recouped, it's really important that, at the outset, the debt agreement that's set up by the administrator is sustainable and appropriate, and looks at the other options beforehand. People have more than a debt agreement or bankruptcy to pick from; there are other options that might apply, depending on the individual circumstances. Given that administrators are now the primary source of information for 92 per cent of people in a debt agreement, it's really essential that that advice that they're giving—on whether to enter a debt agreement and on what terms—is high quality and that we can trust the integrity of administrators, because, ultimately, when people are reaching out for help to get their debts under control, that's what they need; they need some help. They don't need a company that's just looking to make a quick buck from their financial misery by suggesting an expensive form of insolvency that they don't need or that won't help them. Thank you. I'm happy to take any questions.

CHAIR: I thank you both for your very detailed submission and also for the recommendations. You've obviously put a lot of work into this.

Ms Newton : Apologies about the length.

CHAIR: I want to come back to what you actually do, because it seems like a lot of the things you've recommended are things which perhaps a properly financed group like yours might do better than anyone else. You're dealing with 60,000, let's say—was it?—a year across Australia. Or was it 30,000 or whatever. But in regard to this part of your service, can you advise people whether this is fair or not fair? Are your staff legally qualified people?

Ms Newton : We have different teams. As Karen mentioned earlier, we have financial counsellors who are accredited, and they operate the National Debt Helpline. They would take calls from people in financial stress who maybe think, 'My credit cards are out of control. I'm approaching retirement. I've got to get this situation under control,' and they call up for some advice. Financial counsellors can basically go through a bit of a budget, work out their expenses, their income, their debts and what's due when, work out what options are available to them, give them advice on the pros and cons of each option and give them some guidance as to what may be the better options. We also have a Consumer Action legal team. We have qualified lawyers who run casework, including casework against administrators that have engaged in misconduct. We have some examples in our submission where we've negotiated outcomes for people because there has been some impropriety involved. So it's both giving advice to people on debt but also giving advice on what's happened with the debt agreement and whether there is a valid claim there against the administrator.

CHAIR: Do your roles cross over with the administrator's.

Ms Cox : Only to a certain extent. Certainly, in the up-front advice component, in terms of what is a good option, the roles overlap incredibly. And, just to clarify, we run the telephone counselling for the National Debt Helpline. It's very much an initial triage type of service. To do a full-on financial counselling session with somebody where you actually do negotiate with all their creditors takes a lot more work. There are financial counsellors across Australia who do that work, but their numbers would be somewhat limited compared to the availability of administrators. But the actual work of administering the agreement is something that is only done by registered debt agreement administrators.

CHAIR: But you would know the debt agreement managers, or you'd get to know them. Can you give advice and say, 'Don't go to them because they ripped off Jen. We know about them, so go somewhere else'?

Ms Cox : One of the problems is that we don't, as a general rule, refer to our for-profit practitioners—in the same way that we can't refer to creditors—because that would be a conflict for us. Also, we actually find these problems pretty much across the board, so we would be struggling to find someone we wanted to refer someone to.

Ms Newton : We do think tat the problems in this industry are structual, and that's why we support these changes to the act. What we really need to do is create incentives to have fair and sustainable debt agreements that work for the debtor and the creditor, and we just don't really have that at the moment. Similarly, on the issue around the referrals, in our view, there's probably a much narrower band of people who are genuinely suited to a debt agreement than what we're seeing caught up in the regime at the moment. In our view, it tends to be that these things work best for someone who is trying to save the family home, is genuinely insolvent and otherwise facing bankruptcy. The third limb would be that they can actually afford to make repayments from their income over the proposed agreement.

CHAIR: There were all those late-night TV advertisements, which I used to be amazed by, that said, 'Well, if you owe some money, come and see us and we'll fix up all your problems.'

Ms Newton : there is certainly some very effective advertising of so-called debt solutions in this industry. The National Debt Helpline by comparison struggled to compete with that sort of advertising. I think one of the problems—and you kind of touched on the root of it—is that we're talking about people who are really financially stressed. In that moment, they're looking for someone who can give them some advice—someone they can trust to help them work through their situation. Advertising and the early conversation that happens with administrators are really crucial to how the person views the product. Even though there are lots of disclosures about the costs and the risk that comes later, it's a bit too late by then because it's very persuasive when there's an ad on TV promising one easy payment that freezes interest and makes the debt collectors go away. That message is really attractive to people who've been struggling for a long time, but whether or not the reality of the debt agreement lives up to that message is another question. In our experience, it often doesn't. What it does instead is just prolong that financial difficulty. It's a real concern.

Ms Cox : I might just add a couple of things to that. The 60c in the dollar that was talked about earlier about the return on debt agreements—most of the clients that we see are paying between 96 and 110 per cent or something like that on their debt agreement. I actually saw one the other day where we calculated they were paying the same amount as they would've paid on their entire debts plus interest. I have never seen that before, I have to say. That was an exception, and I was horrified. I got three people to check it.

The debtors are paying what the debtor gains and is losing the interest or part of the interest. The difference between the 160 is partially made up of the fees, which are probably around 20 to 25 per cent all up in both cases and the other part of people who don't make it to the end. There are quite a few people who will pay a number of years and then have some sort of event that interferes with their capacity to pay and then they fall over. For those people at the moment, they will have paid a debt agreement for maybe two or three years and then they fall over and fall into bankruptcy which then goes for another three years, making it a very, very long drawn-out experience for them.

CHAIR: I shouldn't have to ask you to educate me but, if you enter into a debt agreement, does the interest stop if you owe money to a bank or—

Ms Newton : If you complete it. It does while you're paying it but, if it terminates early, your creditors can immediately recommence collection activity on the full undiscounted amount of the debt and backdate all the interest.

CHAIR: And that's in the original debt agreement legislation a couple of decades ago.

Ms Newton : That's the case now, yes, and I think that will continue to be the case—

Ms Cox : There's no change proposed to that.

CHAIR: You mentioned a couple of case studies. I just happened to look at Jen's: she has a bank loan of $23,000 and a car loan of $35,000 and she earns $48,000 a year. The real problem here seems to be that someone should've advised her originally that she shouldn't take on those loans because there's no way in the world on $48,000 she can pay those off.

Ms Newton : I think that raises a very interesting point, which is whether or not there is actually a lot of irresponsible lending breaches underlying a lot of these debt agreements. If we look at what's going on in the financial services and consumer credit sector at the moment—and we have a royal commission looking into some of these issues—we know that there is a big problem with irresponsible loans given to people who are never going to be able to repay them or repay them without difficulty. In my experience, what I don't commonly see is administrators or these companies giving advice to people on what claims they might have against the bank and whether they even need insolvency. Maybe they need to be looking to some of these other issues that might be underlying this. I'm not sure about Jen's case, but one of the concerns I do have is that, if people just get told, This is the best and only option for you' without there being a thorough assessment with the bank lending and what's going on with the loans, then we are going to see this type of insolvency masking irresponsible lending. We may disagree on that.

CHAIR: Well, I go to the bank and ask them to give me money. I demand, I plead with them to give me money. They give me the money, because I want it, and then it's their fault, not my fault? I mean, it's the nanny state we live in these days and no self-responsibility. I'm preaching from the pulpit here but not very well. Do your organisations give advice or is there a way we should be looking at it—apart from our schools which seem to have failed enormously in the last few decades? Is there any way we can give people advice, like Jen? You don't have to be very bright to work out, on those figures, that she just couldn't possibly pay off those debts. Are you able to give that advice? Or is it a bit beyond your call? And would people know how to come and ask you first off? Is there any way that you can advertise your services?

Ms Cox : I think one of the problems for our service is that we're currently over-run already.

CHAIR: Yes, I'm sure you are.

Ms Cox : I think that there was a day in the last two weeks where 180 people tried to get through to our service. We took 90-something of those calls, which was a valiant effort at the time. But there are so many people out there needing this sort of advice that it would take a significant injection of funding for us to be able to do any more than we're already doing. Having said that, financial counselling services are exactly in that role, although quite often it's not a pre-emptive thing. It's often people who are coming to us when they're already in trouble.

CHAIR: Yes, okay; thanks for that. I'm sure my colleagues have lots of questions as well. We'll start with the deputy chair.

Senator PRATT: Thank you for your very comprehensive submission. I'm not sure if you were here when the department was making their remarks. They told us they've singled out some more urgent areas of reform, which clearly you're supportive of. I'm trying to unpick; there's a lot more here that you're also asking for. Amending this bill will be difficult for us to accommodate if it's going to see significant delay to go through a more holistic process. Would you prefer to see this bill proceed as is, so that people get that relief? I think what you're asking for here would take more stakeholder consultation and more time than we probably have at this point.

Ms Cox : I think we would like to see the bill proceed. It's a difficult question for us because we are convinced it doesn't go far enough. The three-year limit alone, though, would be extremely beneficial, because we are seeing debt agreements running for five to seven years. As I said, some people are falling over towards the end of that and then ending up bankrupt as well, which is a shocking situation. I think if you were to suggest an amendment, one thing that would be worth looking at is the income ratio that's proposed. At the moment, it's looking simply at one side of the equation; it's only looking at income and not the person's expenditure. So it's an extremely crude measure to just say, 'We're going to look at limiting the debt agreement to a percentage of their income', without any regard to what they actually have to pay out.

Senator PRATT: And how many children they have, and those kinds of questions.

Ms Cox : Or any of that. None of that is taken into account.

CHAIR: Is that one of your recommendations? Which one?

Ms Newton : It's No. 4.

Senator PRATT: And so what kind of recommendation should we be making in terms of further review and reform? The department said they review these things on an ongoing basis. Does there need to be a more holistic review? Is there a conversation about what the next tranche of reforms should be that's already happening?

Ms Newton : As Karen said, it's a very difficult question, because we have been waiting on reform of the debt agreement regime for many, many years now. And there have been some earlier rounds of consultation in 2011 and 2012.

Senator PRATT: On other aspects other than—

Ms Newton : On other aspects. Some of the proposals have made it though. Others have disappeared, and we've got some new things in this bill. We are really keen to see some reform now, particularly given the growth of debt agreements and particularly the growth of inappropriate debt agreements. So I think that it would be good to see the bill progress and then look to perhaps a second tranche of reform, slating it in for a time that's soon, because, as we've seen in this, there are probably some better reforms that would get to the heart of the problems.

Senator PRATT: What would they be?

Ms Newton : We support the introduction of suitability statements and minimum thresholds. In the Bankruptcy Act there are already some thresholds for eligibility around when you can enter into a debt agreement. We would like to see a bottom threshold on that. That would be to target people who have no assets and for whom social security is their sole income. They are always going to struggle to make any repayments to their creditors, and they probably have no disadvantage from going into bankruptcy. So there is a real question there as to why they are redirecting public funds designed to provide a very basic standard of living towards paying creditors, along with a chunk to the administrator.

Senator PRATT: Notwithstanding the disadvantage to the creditor of people going bankrupt, in general those debts would be to large commercial organisations and—

Ms Newton : They also tend to be credit card debts, personal loan debts and things like that.

Senator PRATT: So they are not the kind of debt where non-payment is going to put someone else in turn into financial hardship?

Ms Newton : They tend to be to large lenders.

Ms Cox : The people who could benefit from a debt agreement, compared to bankruptcy, are those who have a home. One of the key differences between the debt agreement and the bankruptcy regime is that you can keep your home. But we rarely see homeowners in debt agreements; the overwhelming majority are people without those assets. So if they were targeted to people who actually had a home to save, that would be an improvement—and also people who are in a role where their employment would be affected by bankruptcy but not by a debt agreement.

Senator PRATT: So we would, what, legislate to pick up those particular provisions? Would that be simple to do now in the context of this bill?

Ms Newton : We've put a proposal in there about how that might look; we have framed it as a presumption of ineligibility. You would be presumed to be ineligible for a debt agreement if two conditions applied: firstly, you have no realisable assets, assets that you would lose in bankruptcy; and, secondly, your income is below the threshold for compulsory contributions. We would suggest that that is a rebuttable presumption—and you could rebut that presumption if there is a clear, demonstrable benefit for being in the debt agreement. As Karen said, that might be having a job—

Ms Cox : A director.

Ms Newton : If you are a director of a company, you would lose that.

Senator PRATT: And only the debtor could rebut that?

Ms Newton : That's right. That's what we would suggest to better target the debt agreements away from people in that lowest bracket, who really can't afford it.

Senator PRATT: So the things that you are suggesting that could be doable now could be the income ratio and that rebuttal—

Ms Newton : Yes.

Ms Cox : Yes. And I will look at reducing the ratio overall but also deducting some major costs from that. Housing costs would be the obvious one. If you ignore housing costs, it seems a bit pointless.

CHAIR: Could you please go through what your income to payment ratio means.

Ms Cox : There is in the bill already a proposal to give the minister the ability to impose an income threshold that says that debt agreement can consist of repayments that are no greater than, say, one-third of the person's income. It doesn't actually set the ratio at this point; it just make some suggestions. We support that as a principle. But the problem is that, while you are just looking at the income and not taking their expenditure into account, it doesn't really tell you much. I have seen people in a debt agreement who are paying slightly less than a third of their income and it is still more than they were paying their creditors before and could not keep up with. So it doesn't really assist. If you are going to do an income ratio, where they set a maximum, what we are suggesting is—

CHAIR: A maximum of the income that can be taken?

Ms Cox : That can be applied as repayments under a debt agreement. The first thing you should do is deduct the person's housing costs. If, for instance—

CHAIR: But didn't you just say that very few people with houses—

Ms Cox : I know. But we are trying to get to a point here, through the reforms, where a greater proportion of the people who are in these agreements would actually have houses. But even people who do not own houses will have rent. Everyone has a housing cost and, particularly in our cities, housing costs are huge. So we are suggesting that, if you are going to apply an income ratio, it should only apply after housing—a set standard, easily established cost.

CHAIR: So it should be income, less housing, and then a percentage from there?

Ms Cox : Yes.

CHAIR: But then, if you're doing that, wouldn't—

Ms Cox : Our ideal position would be if you actually looked at their entire income and expenditure but, short of that, you would need to at least deduct housing.

CHAIR: But then wouldn't you also have to deduct food to stay alive?

Ms Cox : Yes.

CHAIR: Where do you stop?

Ms Cox : I agree with you. That's why we think that you should look at their actual situation—their income and their essential expenditure. But if we're going to do it via a ratio, which is what is proposed—

CHAIR: And via a regulation. You're saying that there should be—

Ms Cox : It's already there. There is already a proposal in the bill that the minister will be able to set a ratio—a maximum.

CHAIR: Of income.

Ms Cox : Of income.

CHAIR: But you're saying it should be income less housing costs.

Ms Cox : Less housing costs, and then apply a ratio.

Senator MOLAN: Where did the $55,000 come in for a person with no dependants? It was mentioned by the A-G's Department.

Ms Newton : That's right. The Bankruptcy Act sets thresholds for compulsory contributions, if you're a bankrupt, that you need to make to your bankrupt estate, and that will depend on your dependants. If you don't have any dependants, it's roughly $55,000 at the moment, but it goes up to about $75,000, I think, if you have four or more dependants.

Senator MOLAN: Doesn't it assume an expenditure? It may not be specified, but it certainly assumes—

Ms Cox : Yes, but it doesn't apply under debt agreements.

Ms Newton : Yes.

Senator MOLAN: Ah—got you.

Ms Cox : That is under bankruptcy only. Once you're a bankrupt, if you don't earn over that threshold, you make no contribution. For a debt agreement, it has no relevance. We're suggesting it should, but it doesn't.

Ms Newton : This is the anomalous situation we have at the moment, where people who'd be making no contributions if they were bankrupt and would lose no assets are nevertheless struggling to pay $200 a week to their creditors from their age pension in a debt agreement. That's the situation we see very commonly, and that's where we've suggested what we think would be better targeted reforms. But if there's no time and scope to get those through at moment then, as Karen said, one way would be to adjust the bill on the payment-to-income ratio.

Ms Cox : Yes.

Ms Newton : I would also just note that the bill allows that ratio to go over 100 per cent. The way that—my understanding of the formula—

CHAIR: How does that work?

Ms Newton : It's quite complicated, but my understanding is that, over a three-year debt agreement, that would allow people to pay one-third of their after-tax income to the debt agreement. That is, as Karen's pointed out, before you factor in your housing costs, food, payments on your mortgage, potentially payments that you might owe to civic compliance or child support—

Ms Cox : Electricity.

Ms Newton : Or electricity. None of that is factored in, so the bill allowing people to make repayments of one-third or more of their income, without factoring in any of these other essential costs, is likely to be highly unaffordable and undermine the very intention.

CHAIR: Shouldn't the debt agreement manager be working that all out?

Ms Newton : This comes back to the central problem we see, which is: is the advice, and the structure of the debt agreement that's been set up, appropriate?

CHAIR: So, because that's not very good, that's why the government has to come in and legislate?

Ms Newton : Many of the problems flow from that. That's right.

CHAIR: Sorry, Senator Pratt. We've interrupted you, and we're grossly over time too.

Ms Newton : Senator Pratt, you asked what was easy to do, and one thing that would be very easy to do is to require membership of AFCA. That would be a very easy technical amendment to make.

Senator PRATT: Sorry, require who?

Ms Newton : Require the administrator to join the Australian Financial Complaints Authority. If you look at lenders and financial advisers at the moment, it's very easy.

Ms Cox : And any intermediary used by these people.

Ms Newton : That all exists.

CHAIR: So they should join and be subject to—

Ms Newton : That's right, and then, through that service, people could resolve complaints against their administrator about problems with their debt agreement.

Senator PRATT: Yes, that would be an easy one to do. I think I can cede.

Senator HINCH: I think the AFCA idea sounds like a very good one. In the case of Marie, which I think you mentioned very early in the piece, in a way she would have been better off going bankrupt, because she wouldn't have reached the $55,000. She obviously didn't earn anywhere near that at the time.

Ms Newton : My understanding is that Marie did have a house and there was a negotiated outcome reached with her creditors.

Senator HINCH: People, when they are applying for loans, lie to their bank manager about what they spend on cigarettes, alcohol, entertainment et cetera. I presume some would also lie to administrators on what they think they could afford to pay back in putting this agreement together. I'm not trying to defend the administrators here, but I think people may be so keen to avoid the stigma of bankruptcy that they would do any sort of deal they could put together to stave it off. Would that be fair?

Ms Newton : It's probably fair to say that there are not very workable budgets in debt agreement proposals, but I probably wouldn't agree that people are necessarily lying to their administrator about that. I think what tends to be the case is that, when people are in financial stress and may have their head in the sand a little bit because of the stress of their situation, they may not be in the best situation to be, in a free 15-minute phone consultation, giving very accurate information about their incomings and outgoings. So I think it is incumbent upon the administrator to make sure that the budget that's proposed is verified and that they have all of the facts about their actual situation.

Senator HINCH: Do you think they're also ignorant that many administrators are businesses—they are in there to make money; they're in there to make their fees and a decent percentage, 25 per cent or whatever it is? Do you think people are unaware of that and see the administrator as a sort of financial saviour, naively?

Ms Cox : Absolutely I think that's the case. They do. They fall for the advertising, whether it be on television or online, they see a lifeline, and they grab that lifeline. Then, in our experience, what usually happens is that the person is told to stop paying their creditors immediately, which is a very comforting thing for them because they don't have enough money, and to direct some money instead towards the administrator, or the broker—quite often there is an intermediary involved here. So a direct debit is set up and they paid them instead. That goes on for some months. So some money is accumulated towards the upfront set-up fees. In that period, their creditors, understandably, become antsy and start to harass them over why they're not making payments. So they get this greater and greater sense of urgency—that they want this debt agreement to be finished and to go through, to solve all their problems. By the time they get the disclosure about the actual nature of the agreement—which is the prescribed information the government says you have to tell them about, it being a debt agreement under the Bankruptcy Act, but also the full set-out of fees, which shows not only the upfront fee, which they'll know about, but how much of the overall money is directed to the administrator—people are so invested, because they've been subjected to pressure, that it's a bit too late for that information to have any real impact. We do get calls occasionally from people at that late stage wanting to pull out, but very rarely.

Senator HINCH: If this debt agreement all falls over, you lose any previous fees paid and you are deeper in shtook than you should be?

Ms Newton : That's right.

Ms Cox : Exactly.

Ms Newton : And it's very difficult to get that money back, even where, on the face of it, it was clearly inappropriate or there has been a misleading representation. It's very difficult to recover that money from the administrator or broker, short of negotiation.

Senator MOLAN: A very simple question: at one stage you said someone did away with credit card debt. Who can do away with credit card debt? You said 'relieves' credit card debt?

Ms Cox : We spend a lot of time negotiating with creditors, and, for someone like an elderly person on the pension who has unsecured credit—and who sometimes has been paying it for years and making no advance whatsoever—many of the creditors, particularly big banks, will waive or reduce debts. In fact that's one of the things that drives us crazy about debt agreements: that, so often, we get good results from people dealing directly with the creditor—far better than they would have achieved by going through the debt agreement process. In a lot of cases, the creditors can be better off as well, because they could actually get a sustainable repayment that didn't involve any diversion of funds.

Ms Newton : Unfortunately, most people in that situation aren't aware of all of their options, and, unless they get good, independent, unbiased advice at the outset, they're likely to just follow the advice that they get, and, if that advice is to enter a debt agreement, off they go.

CHAIR: Did you make a submission to the government on the exposure draft of this bill or whatever the consultation process was?

Ms Newton : We made submissions on the two rounds of consultation in 2011 and 2012.

CHAIR: Were any of your submissions accepted?

Ms Newton : I assume so, yes, but I will take that on notice and come back to you! They were certainly published.

Senator PRATT: It was a long time ago.

Ms Newton : It was a long time ago. You'd have to dig through the archives.

Senator PRATT: I can understand your concern in wanting to see more done now, given that time frame.

Senator HINCH: You know the Canberra three Ds: delay, delay, delete!

Ms Newton : I believe we published ours on our own website, so they are available.

CHAIR: I was going to say that this government is actually trying to do something positive. I'm not quite sure why it has taken three years to get to this point. But your submissions would've been 2½ years ago, I take it?

Ms Newton : That's right.

CHAIR: You've raised a couple of recommendations that I think the whole committee thinks sound simple and relatively acceptable, although we will hear from other witnesses later—

Ms Newton : I'm sure. No doubt.

CHAIR: and we might change our minds after hearing others. We do appreciate the help. Keep up the good work.

Ms Newton : Thank you.

Ms Cox : Thank you.

CHAIR: Now we will break until around half past 11. I'm sorry for our next two witnesses, who are going to be running half an hour late because we are, but we'll start again at half past 11 with Justice Connect.

Proceedings suspended from 11:24 to 11:35