Greater protections for borrowers under new debt collection guidelines

Borrowers struggling to stay afloat will be offered greater protection from debt collection agencies under new guidelines being applied by Australian banks.

As recently reported by the ABC, debt collectors can legally sue to recover debts as little as $5,000, with one debt collection agency suing hundreds of people for bankruptcy to recover debts.

“Consumer advocates were alarmed the tactic meant people were being dragged through the courts and risked losing their homes over small debts,” the ABC report states.

New guidelines

The good news for borrowers is that the Australian Banking Association’s (ABA) new guidelines not only outline a new, more stringent process that banks must follow before they sell a debt to a collection agency, but it also includes provisions for once a debt is sold.

The guidelines outline that adhering banks must:

– proactively contact a customer to find other solutions before a debt is sold (this can include restructuring, consolidation and hardship support)

– not sell any debt that is in the process of being disputed by a customer

– only contract debt collectors that follow all regulatory codes and a bank’s own policies for supporting customers in hardship

– regularly audit all contracted debt collectors to ensure they meet the high standard set by the new guidelines

– require a debt collector to consult with a bank before bankruptcy is initiated, giving the bank an opportunity to repurchase the debt if a vulnerability is identified

– as an interim before a government review, each bank will assess the bankruptcy threshold and determine an appropriate level (for competition reasons the industry as a whole cannot set its own level)

– if a customer has an ongoing vulnerability and there is no reasonable prospect of the debt being repaid a bank will not sell this debt.

Moving forward

As part of the new guidelines the ABA, along with consumer groups Financial Counselling Australia, the Consumer Action Law Centre, and the Financial Rights Legal Centre, have written to the federal government to request a review of the $5,000 threshold for forced bankruptcy.

“This new guide includes some really important protections, including that even if a bank sells a debt, the debt purchaser cannot move to forced bankruptcy without the permission of the bank,” says Fiona Guthrie, CEO of Financial Counselling Australia.

Gerard Brody, CEO of the Consumer Action Law Centre, says the new guidelines will help ensure forced bankruptcy is the last resort possible.

“It is so important that debt buyers understand customer circumstances and explain why bankruptcy is appropriate before taking this sort of harsh debt collection action,” says Brody.

“No one should risk losing their home because they’ve found themselves in a vulnerable financial position.”

Final word

As outlined above, if you’re going through financial hardship and are struggling to repay your debts, there are often a number of other steps you can take before resorting to bankruptcy.

If you’d like to explore those options, get in touch – we’d be happy to go through them with you.

Disclaimer: The content of this article is general in nature and is presented for informative purposes. It is not intended to constitute financial advice, whether general or personal nor is it intended to imply any recommendation or opinion about a financial product. It does not take into consideration your personal situation and may not be relevant to circumstances. Before taking any action, consider your own particular circumstances and seek professional advice. This content is protected by copyright laws and various other intellectual property laws. It is not to be modified, reproduced or republished without prior written consent.