First published in the Herald Sun 10 September 2020
Australians’ debt problems will skyrocket due to the COVID-19 recession. We need to act now to ensure people in debt are treated fairly in the months and years to come.
In their updates to the stock market last month, ANZ and Westpac announced top ups to bad debt provisions of $500 million and $826 million, respectively. Bad debts are those that a business considers no longer collectible given the position of the borrower.
These announcements are on top of almost $5 billion in COVID-related bad debt charges across the major banks’ previous results in April and May. Energy companies too are reporting debt concerns, with both AGL and Origin setting aside tens of millions of dollars for bad and doubtful debts.
However, these debts do not just ‘disappear’. Even when banks and utility companies categorise debts as ‘bad’ in their financial accounts, they continue to be owed by individuals, families, and small businesses.
For many debts, like personal loans and credit cards, banks and other lenders commonly sell these debts to debt collectors for cents in the dollar. Utilities companies, like electricity, gas and telecommunications, do this regularly too. In turn, debt collectors seek to collect the debt in full.
With the unemployment rate skyrocketing, there will be growth in household debt and an avalanche in debt collection. The people who have lost their jobs or small businesses through no fault of their own are the ones they will be collecting from. It is vital that we treat them fairly.
There are three things that can be done now to support recovery from the COVID recession.
First, we need to ensure creditors and debt collectors comply with consumer protections. Existing laws prohibit harassing or misleading conduct. There are also limits in how many times you may be contacted by a debt collector, and they must act reasonably.
The problem is that these rules are too often ignored. In the last few years, the Australian Competition & Consumer Commission has had to resort to legal action to deal with bad debt collection practices. In one legal case, a debt collector unreasonably harassed a care facility resident who had difficulty speaking after suffering multiple strokes. In another, a debt collector continued to badger people who had raised disputes about the debts in question.
Compliance with consumer protections can be improved by ensuring the initial business—the bank or the utility company—does not fully wipe its hands of the matter just because the debt has been sold to a debt collector. These businesses should not be able to just sell debts and move on. We need much greater transparency and oversight of the debt sale sector, including requiring initial creditors to retain responsibility and ensure compliance. After all, it is the bank or utility company that is the responsible business.
Second, people need to be protected from unfair collection tactics. As part of the COVID-19 legislative package that brought us JobKeeper, the Federal Government made some temporary changes to insolvency laws to make sure people were not bankrupted unfairly. These included lifting the debt threshold before a person can be made bankrupt from $5,000 to $20,000.
Bankruptcy is a serious step and should not be forced on to someone over a small debt. There are a range of other ways to deal with small debts, including affordable payment arrangements.
The temporary change to the bankruptcy threshold was this week extended until 31 December. But it’s after the new year when debt problems will escalate. The threshold should be lifted further—to $50,000 as a minimum. Bankruptcy comes with many additional costs and can put people’s homes at risk. It should not be an available debt collection tactic for debts below $50,000.
Finally, we need to ensure people have access to independent and high-quality advice and assistance when they are in debt. The problem is that debt management firms—known as debt vultures—advertise heavily and promise an ‘easy fix’ debt solution but commonly do not deliver. Instead, these unqualified, unregulated firms charge exorbitant fees and leave financially struggling families with even less money.
With growing financial difficulty due to COVID-19, business will be booming for debt vultures. The Federal Government needs to act urgently to reign them in, to ensure people can access quality debt advice.
The good news is that there are free and independent debt advice services from qualified financial counsellors. You can speak with a financial counsellor by calling the National Debt Helpline on 1800 007 007 or by visiting www.ndh.org.au.