Bankruptcy

Good Government (Under Threat) Down Under

By Jean Braucher

Australia has a bankruptcy system worth studying.  Among other merits, it collects and publishes more facts about its system on line than any other.  http://www.itsa.gov.au/dir228/itsaweb.nsf/docindex/about+us-%3Epublications-%3Epublications?opendocument

Prior to 1996, Australia probably had the most sensible bankruptcy system in the world.  Bankruptcy is simple enough there that people can file without paid professionals to help them.  Rather than means testing that adds costs and thus bars destitute debtors at the threshold, Australia imposes a ?surplus income? payment requirement on debtors who file in bankruptcy and have income above a relatively low threshold.  Last year, just over 15 percent of Australian debtors had to pay something to get a discharge, while the rest of debtors weren?t burdened with a complicated ?means test? to get into bankruptcy.

There is only one problem with this story; it was too good to be true.  In 1996, Australia amended its law to create a ?debt agreement? option.  It sounded great; family members and neighbors would pitch in to help debtors negotiate with creditors to work out their debts and avoid the ?stigma? of bankruptcy.  But commercial debt administrators revved up operations to promote this option, and within a few years, they were charging hefty fees and getting a lot of poor people to use it.  Well over half of those who proposed debt agreements failed either to get their proposals approved or to complete their plans. Sound familiar?

In 2007, Australia amended its law to regulate the debt administrators.  But it is far from clear that this will be enough to keep debtors with no hope of repaying their debts from using this option.  In the last two years, more was being paid by debtors using debt agreements than by those filing for bankruptcy,so eliminating the option became politically impossible.  Debtors lucky enough to find their way into bankruptcy in Australia still get relief at low cost.  The problem is the others, who get diverted by debt administrators and fail more than half of the time.

The broader point is that ?confusopoly? is a great strategy if you want to keep debtors from getting a discharge of debts they have no hope of repaying.  Even though they can?t repay old debts in full, they pay a little more as they stay on the debt treadmill.  Make a system more complicated, and more people will have no idea what is going on.  Again, sound familiar?

Full post as published by Credit Slips on January 29, 2008 (boomark / email).