A fee for failure: Paying to go bankrupt makes no sense
- Published: 23 March 2014
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Consumer advocates and financial counsellors have expressed their opposition to a new fee aimed at people filing for voluntary bankruptcy in Australia, arguing that the fee will further disadvantage individuals and families who are already struggling under the weight of unmanageable debt, writes Alison Waters.
24 March 2014
The administrator and regulator of Australia’s personal insolvency system, the Australian Financial Security Authority (AFSA), plans to implement a fee for individuals who apply for voluntary bankruptcy. This lodgement process is referred to as a debtor’s petition, and will soon cost individual applicants $120.
Yes, a fee to go bankrupt.
The fee is intended to function as a cost recovery measure, however consumer advocates and financial counsellors have expressed concerns that low-income debtors will be disadvantaged by the fee’s implementation.
Financial Counselling Australia (FCA), the peak body for financial counsellors in Australia, wrote a submission to the federal Attorney General’s Department, outlining its strong opposition to a fee for lodging a debtor’s petition. The organisation asserts that the fee, due to commence on 1 April 2014, will have a significant and detrimental impact on those considering bankruptcy.
“In our experience, people contemplating bankruptcy do so as a last resort,” Fiona Guthrie, Executive Director of Financial Counselling Australia, tells The Scavenger.
“They have very little money and simply won’t be able to afford the fee. It seems a very odd thing to attempt to charge people a fee in these circumstances. They’re going bankrupt for heaven’s sake – by definition they don’t have a brass razoo.”
The Consumer Credit Legal Centre (NSW) (CCLC), a community-based consumer advice, advocacy and education service that runs a state-wide credit and debt hotline for people experiencing financial difficulties, also expresses staunch opposition to the fee.
Annually, the hotline receives an average of 700 phone calls from people in the process of lodging – or contemplating lodging – a debtor’s petition. Sixty-two percent of those callers report that they live on annual incomes of less than $26, 000.
“By the stage these clients are contemplating filing for bankruptcy they are in severe financial hardship, living day-to-day and are having trouble meeting basic living expenses,” writes CCLC in its submission to the Attorney-General’s department. “Such clients have likely been operating on very low incomes for a long time, have little if any funds available to them and have no capacity to save.”
Bankruptcy in Australia
In 2012-2013, approximately 19, 000 Australians applied for bankruptcy. Over the past decade, ‘unemployment or loss of income’ has been nominated as the most common reason for pursuing non-business related bankruptcy. Most Australians who apply for bankruptcy earn under $30, 000 annually.
Bankruptcy: a fresh start
Bankruptcy infers rights and obligations on an individual. CCLC describes bankruptcy as an ‘exchange’. That is, an individual relinquishes control of their property and finances to a trustee in exchange for protection from legal action by creditors.
A bankrupt person is permitted to retain basic household possessions and a car (up to a specified value), and is restricted from borrowing money and travelling overseas.
Bankruptcy has been referred to as a ‘fresh start’ for those experiencing unmanageable debt. Financial counsellors and consumer advocates have concerns that the fee will deter or delay people from applying for bankruptcy, thus exposing them to further debt and preventing (or delaying) access to a fresh start for themselves and their families.
‘Too poor’ to go bankrupt
“A fee for bankruptcy, no matter how small, will act as a serious barrier,” writes the FCA writes in its submission. “A $120 fee is unattainable for most clients of financial counsellors….We are also concerned that some people, in an attempt to find the money for the fee, will go without food or medicine... Financial counsellors see clients now who do both these things in order to pay creditors.”
Guthrie suggests that the introduction of a fee in Australia may create a scenario that is evident in the United Kingdom, where a bankruptcy fee already exists. That is, some people being ‘too poor’ to apply for bankruptcy.
“This means they’ll stay trapped in debt, fielding calls from debt collectors,” says Guthrie. “Others [may] try to borrow the money somehow or ask charities for assistance.”
In the UK, for example, some charities award grants to cover the costs of bankruptcy fees (see example here).
Katherine Lane, Principal Solicitor at CCLC, tells the Scavenger that obstacles to pursuing voluntary bankruptcy already exist and include complicated forms, lengthy waiting lists to access free financial counsellors and complicated information provided by AFSA.
She explains that some debtors “feel like they have failed in going bankrupt even though the circumstances that cause insolvency are beyond their control, [such as] illness and unemployment”.
In its submission, CCLC asserts that bankruptcy is not something entered into lightly by individuals. “It is still regarded by most people as carrying a significant stigma.”
Lane says that individuals coping with mental illness and struggling to cover basic living expenses may face an “insurmountable task” in their efforts to raise the fee.
Charities may carry the burden
Guthrie believes that the introduction of a fee will have an impact on charitable organisations in Australia.
“We are likely to see people seeking more material aid – because they’ve used their money for the bankruptcy fee and then can’t buy food or pay a utility bill or asking charities if they can pay the bill for them,” she says.
This would lead to a “bizarre situation”, whereby charities use their own funds to assist clients to pay the bankruptcy filing fee. In effect, the not-for-profit sector would be subsidising the government.
“Where that charity receives government funding, the government has simply shifted costs between entities,” writes FCA in its submission. “Charities, as a result, will also have fewer funds to use for their other activities.”
Not effective for creditors
Guthrie points out that the proposed fee is also “bad news” for creditors.
“We need an insolvency regime that actually works. Creditors and debt collectors will be wasting resources on trying to collect uncollectable debts, or some people will go further into debt but creditors will not be repaid.”
Counter to the spirit of the legislation
The FCA argues that the introduction of a fee to file for bankruptcy is not “good public policy”, and questions whether a filing fee is “consistent with the ethos and purpose of the bankruptcy regime”.
One cannot help but query the logic of attempting to recover costs from low-income debtors who are filing for bankruptcy.
Moreover, a cost recovery approach to debtors lacks compassion, and creates an unnecessary obstacle to their desire to escape the weight of unmanageable debt.
Alison Waters is Associate Editor of The Scavenger.