Informal debt agreements outside of the Insolvency Act

A new breed of "debt-help'' competitor is springing up, especially online, with names like nobankruptcy.com.au and mybudget.com.au, as well as minor start-ups such as creditplanb.com.au.

These services specialise in helping people overloaded with debt set a budget, negotiate affordable repayment plans with creditors and manage repayments – for a fee.

They are effectively creating informal debt agreements outside of the Insolvency Act.

Their customers, the people overloaded with debt, are not left with a lifelong black mark against their credit profile but may be without rights.

Fox Symes has dominated the debthelp industry for almost 10 years with its daytime television marketing strategy and slogan: "One thing saved me, a phone call to Fox Symes.'

In the past two years, Fox Symes has helped thousands of consumers repay $55 million to their creditors through a debt agreement registered under Part IX of the Bankruptcy Act.

The company administered 51per cent of all debt agreements registered with the Federal Government's Insolvency and Trustee Service (ITSA).

Fox Symes charges, on average, $100 per month in fees to collect one big repayment from the debtor and distribute it to creditors, who accept an average total repayment of 76 cents in the dollar of the debt owed.

That is expensive but that service comes with rights, said Fox Symes director Deborah Southon. "There are a number of operations negotiating de facto debt agreements with creditors but there is nothing there to bind creditors to the agreement,'' Ms Southon said. "A debt agreement is binding on creditors as well and provides debtors with certainty.

"Some people criticise formal debt agreements but they bind creditors as well to a deal and give debtors rights and let debtors move on.''

The marketing of Part IX debt agreements as pseudo debt consolidation instruments has been consistently criticised by consumer advocates and financial counsellors for years but they consistently deliver for creditors who have largely come to support them post-2007 reforms.

Nobankruptcy.com.au's Christian Oey said anybody could negotiate with their creditor if they were persistent enough. "You have to be patient and persistent and try to get to a person with authority over the computer,'' he said. "That's what we do and it can take time but it works.

"It is easier for us to do it for people. We know how things work.'' Mr Oey is a critic of formal Part IX debt agreements.

"There is no reason why heavily indebted consumers should sign a debt agreement. They are an act of bankruptcy that stays with you forever,” he said.

"Sometimes we have to be persistent and patient but we generally get to talk to decision makers at the creditors and do a deal that doesn't involve a debt agreement - that is good for everyone.

"Often people don't understand what the full consequences of a debt agreement are.''

Ms Southon said consumers should be aware that informal or de facto debt agreements do not prevent creditors from taking action in the future. "Informal debt agreements are a problem,'' Ms Southon said.

"A similar trend is emerging in the United Kingdom.

"There are some notorious small operators in this area.''

Formal debt agreements face another challenge from the government.

Changes to bankruptcy laws will add an up-front government fee to formal debt agreements from October 1.

The fee is expected to be $200 - plus an ongoing trailing commission on repayments of 1 per cent, which will be payable to the Federal Government's ITSA.

The debt help industry is already under pressure, and not just from economic stimulus payments and low interest rates.

There are only 14 registered debt agreement administrators left in Queensland.

There are 36 in Australia.

"The new fee will be problematic,'' Ms Southon said. "I wouldn't be surprised if the fee meets a lot of consumer resistance.

"What is ITSA going to do if a debtor refuses to pay the fee or can't pay the fee?

"These people can't pay their bills now.''