Need to know
- Bankruptcy can have long-term impacts, and consumer advocates say it's a decision that should only be made with independent advice
- A number of for-profit companies offer bankruptcy advice for a fee, but the bankruptcy regulator warns about 'untrustworthy advisers'
- Free and independent advice and help is available from the National Debt Helpline
When Alex* found himself in around $13,000 debt earlier this year and unable to pay his bills, he did what many people would do and searched for help on the internet.
He came across a company which initially promised to help him restructure his debts into one payment. It wasn't until later that Alex found out the company would charge him a $2000 fee for doing so.
"They promise you the earth and then you get nothing. I had my hopes very high on getting out of debt, paying a small amount back at a weekly rate sort of thing," he says.
They promise you the earth and then you get nothingAlex, who sought help from a for-profit bankruptcy adviser
Alex has been on a disability support pension for decades, so his financial options were limited.
In the course of several phone conversations, the company then said it wouldn't be able to to help Alex after all, and suggested he go bankrupt instead. The company did not offer to do the bankruptcy paperwork for him.
Alex then called the National Debt Helpline, a free financial counselling service. He was connected with a financial counsellor who is currently helping him clear many of his debts on the grounds that incomplete credit assessments were done when he was given the loans.
"The financial counsellor wouldn't have a bar of it. They said there is no need for me to go bankrupt," Alex says.
A free financial counsellor may be able to help you find ways to avoid bankruptcy.
Declaring bankruptcy can get you out from under your debts in the short term, but can have lasting consequences, such as not being able to qualify for a loan or being denied access to other financial products and services.
There were 2400 personal insolvencies in Australia between July and September last year, 1400 of which were bankruptcies. Experts say insolvency numbers have come down since the COVID pandemic, largely due to government support payments. But they're likely to rise again now that support has ended.
Nicola Howell, a senior law lecturer at Queensland University of Technology who researches bankruptcies, says people are particularly vulnerable to offers of an easy escape when they reach a point in their life where bankruptcy seems like the only way out.
The top search result on Google is not always going to be the best advice – in fact quite often it won't beNicola Howell, senior law lecturer, Queensland University of Technology
"They feel embarrassed that they're in this position that they can't work out what to do. So it's really a very difficult time for people," she says.
"The stress of being contacted by credit providers and/or debt collectors when you don't have money to pay is really very difficult."
While there is free and independent advice available from financial counsellors at the National Debt Helpline, Howell says many people are unaware of the service and may end up paying for advice they could get for free.
"People are stressed and embarrassed about their situation. It's hard to go around trying out lots of different options, testing out different advisers. The top search result on Google is not always going to be the best advice – in fact quite often it won't be," she says.
No shortage of companies
When you search terms like 'bankruptcy help' or 'bankruptcy advice' on Google, the results feature several paid advertisements at the top, well ahead of authorised government advice around bankruptcy and the National Debt Helpline page.
Companies such as Bankruptcy Advice Centre, Bankruptcy Experts and Australian Debt Solvers, which may appear at the top of the results page, offer their services for a fee.
Consumer advocates say the paperwork required to go bankrupt is consumer-friendly and that anyone can do it themselves
Other players in the market we found in our Google search include Debt Busters, Debt Cutters, Solve My Debt Now, Aravanis, Beyond Debt and My Bankruptcy.
Some of these companies offer to restructure debts (an action that may come with other issues), while others offer to 'assist' customers with the process of declaring bankruptcy.
Consumer advocates say the paperwork required to go bankrupt is consumer-friendly and that anyone can do it themselves without paying for assistance. Free help is also available, so companies offering a paid service are charging for something unnecessarily.
The best advice is free
Tom Abourizk, a policy officer at consumer advocacy organisation Consumer Action Legal Centre, says he sees very limited situations where someone should pay for advice on how to apply for bankruptcy. Abourizk says bankruptcy often isn't the only option, or the best one.
"Free financial counsellors are trained to help people who are in crisis and talk through situations. They know all about the rights you have with different debt collectors [and] creditors, how you might be able to seek assistance from the bank, and what things you can ask for.
"So getting someone who's trained and is independent and able to assist you is really important if you're struggling with your debts," he says.
How to spot an untrustworthy adviser
The Australian Financial Security Authority (AFSA), which oversees the bankruptcy act, says there are "untrustworthy advisers" in the market.
"If you're facing financial difficulty, it's important to get advice you can trust. Some unregulated, unlicensed advisers target vulnerable people, promising outcomes that are too good to be true," a spokesperson tells CHOICE.
AFSA warns of the following common red flags of untrustworthy advice:
- creating an unnecessary sense of urgency
- charging a fee to submit a bankruptcy application
- encouraging false or misleading statements in bankruptcy paperwork
- suggesting that a bankruptcy or debt agreement won't affect a credit rating
- claiming they've done this many times before and won't get caught.
The Australian Financial Security Authority has a checklist of red flags that could indicate untrustworthy advice.
Licence requirements create confusion
Abourizk says the presence of so many different types of companies in the bankruptcy space is a worrying sign, especially since licensing requirements vary.
"The fact that you can have maybe three or four different types of qualifications and be operating in this space and that, depending upon the qualification and the licence you have, there are significantly different standards and obligations that apply to you, does suggest that there's a real need for a clearer, much stronger framework for licensing," he says.
There's a real need for a clearer, much stronger framework for licensingTom Abourizk, Consumer Action Legal Centre
The Australian Securities and Investments Commission (ASIC) says companies may not be required to hold a licence if they're only providing bankruptcy advice. The government introduced reforms for licensing of debt management services in 2021, but they still don't cover all the businesses operating in this sector.
"Whether a company is required to hold a credit licence to provide debt management services will depend on the activities engaged in by that company," an ASIC spokesperson says.
According to ASIC, a company will need to be licensed if:
- it charges a fee for helping a customer apply for a change to a credit contract or to postpone enforcement proceedings
- gives hardship notice
- makes a complaint to a credit provider.
But if the debt management firm provides advice before the customer applies for bankruptcy, "it is likely the company would not be required to hold a credit licence", the spokesperson says.
Exploiting a loophole?
ASIC says the question of whether pre-bankruptcy debt management companies should be required to hold a licence is a matter for the federal government to determine.
The regulator referred to a January 2022 paper released by the Attorney-General's Department on proposed reforms to the bankruptcy system, which included stakeholder concerns about pre-insolvency advice by untrustworthy advisers.
"The government is considering strengthening detection of untrustworthy adviser activity, and introducing new offences targeting untrustworthy adviser activity," the spokesperson says.
It's very hard to imagine that many of these [commercial providers] could ever provide a service that's worth the money they're chargingTom Abourizk, Consumer Action Legal Centre
Abourizk says it's important more people know about the free advice available to everyone in Australia through the National Debt Helpline.
"Advice for the vast majority of Australians, or anyone in Australia, is free from the financial counsellor, and they're trained to act independently, in your interests," he says.
"It's very hard to imagine that many of these [commercial providers] could ever provide a service that's worth the money they're charging. The fact that there are still loopholes, still ways for them to operate in this space, is a real concern."
If you need to talk to someone about your financial situation, you can contact the National Debt Helpline on 1800 007 007 or visit ndh.org.au.
*Not his real name
Stock images: Getty, unless otherwise stated.