Many financial terms may be unfamiliar to you, particularly those relating to debt enforcement and debt collection. The following a is Glossary of common financial terms. We have tried to give definitions in plain english.
Acceptance Date – The date that AFSA accepts your debt agreement for processing and distribution to creditors. The date is important as it is the date at which legal action, interest, fees and charges, enforcement action and creditor contact ceases.
Act of Bankruptcy – An action or declaration which, if not carried through, can be used by a creditor to apply to the Court to force a person into bankruptcy.
AFSA – Australian Financial Security Authority. It is the Commonwealth Government agency that becomes the trustee when a private bankruptcy trustee is not appointed in a bankruptcy or other arrangement under the Bankruptcy Act. It oversees the Bankruptcy Act in Australia including Debt Agreements and Personal Insolvency Agreements
Arrears – Arrears is a legal term for a type of debt which is overdue after missing an expected payment. Generally it referres to the length of time you are behind with a loan and is measured in months. E.g. “I’m three months behind with my debt consolidation loan,” means that you’re three months in arrears.
Bankruptcy Act 1966 – The Commonwealth legislation which covers bankruptcy, Part IX (Debt Agreements), and Personal Insolvency Agreements. It deals with individuals, not corporate entities which are covered by the Corporations Law and administered by the Australian Securities and Investment Commission.
Bankruptcy Notice – A formal, final demand for payment of a debt by a creditor owed at least $2,000 on one or more final judgments or final orders. This notice is issued by AFSA through the Official Receiver. Failure to pay within 21 days is an act of bankruptcy.
Bankruptcy Offence – An act by a person under the Bankruptcy Act that can lead to a person being prosecuted, fined, imprisoned, or made to make restitution.
Benefit – A bankrupt may derive a benefit from a number of sources. It could be a loan, a fringe benefit, or monies paid to a third person as a result of exertion by a bankrupt. These types of benefits can be included as a part of a bankrupt’s contribution assessment to determine what contribution must be paid from a bankrupt’s income.
Clear Out – A type of credit Default used when it seen that a debtor has changed their address and contact numbers to avoid repaying the debt.
Collateral – Collateral refers generally to an asset provided as a guarantee by a debtor for the repayment of a loan. E.g., a car is the collateral for a debt consolidation loan.
Completion Date – The date on which a Debt Agreement or Personal Insolvency Agreement is scheduled to finish.
Consultancy Fee – A fee charged by Debt Agreement administrators to cover the upfront costs of preparing a Debt Agreement Proposal.
Controlling Trustee -A person who is a private bankruptcy trustee, AFSA, or an eligible solicitor who investigates a debtor’s financial affairs and calls a meeting of the debtor’s creditors under Part X (Personal Insolvency Agreement) of the Bankruptcy Act.
Creditor – A person or instituition (company, government agency, etc) to whom money or debt is owed by a debtor. This may have arisen through providing a loan for the debtor, or it may be an overdue bill. E.g. if Person A takes out a debt consolidation loan with Bank B, then Bank B is the Creditor.
Creditor’s Petition – A means by which a creditor makes an application to the Court to make a debtor bankrupt.
Current Amounts – Amounts or thresholds above which an individual will have to give money to their creditors under bankruptcy. If the bankrupt earns more thant the current amount for income, some money above this will go towards the creditors. The amounts are periodically adjusted in accordance with the Consumer Price Index. Some are adjusted every quarter, others every six months. As an example, they identify the value of assets that can be retained by a bankrupt, or the income a bankrupt can retain before they are required by law to contribute towards their bankruptcy.
Debit – An accounting term relating to double entry book keeping. It is derived from the Latin term “debitum” which means “that which is owing”.
Debt Agreement Administrator – Any responsible entity registered with the Commonwealth agency AFSA to administer a Debt Agreement on behalf of an individual under the bankruptcy act.
Debt Agreement Proposal – The most important document involved in a Debt Agreement. It is the legal document outlining the proposed payment arrangement, and is forwarded to creditors.
Debt Collector – A business that pursues overdue debts on behalf of a creditor. Generally Debt Collectors will receive a fee or percentage of the debt in payment for their services. Some debt collectors will purchase overdue debts for a fraction of the debt and then pursue the debtor for the full amount.
Debtor – A person or institution who owes money to a creditor, sometimes referred to as a borrower. If I take out a debt consolidation loan from Bank A, I am the debtor.
Debtor’s Petition – An application made to AFSA to become a bankrupt. The form to use is Form 6 under the bankruptcy act.
Default – Occurs when a debtor does not meet their legal obligation according to the finance contract. Also refers to notations on an individual’s credit history regarding the same.
Default Notice – A printed letter or notice issued as a requirement under the Credit Code advising a Debtor that they have defaulted on a credit contract. It will generally advise how much the debtor needs to pay by a specific time to correct the default.
Discharge – The end of bankruptcy. The date of discharge is the day after bankruptcy ends. The statutory period of bankruptcy is three years and one day from when a person files their Statement of Affairs at AFSA through the Official Receiver.
Dividend – A distribution that is made to creditors from any asset or income realisations in an administration under the Bankruptcy Act.
Divisible Asset – Assets/property which can legally be sold in bankruptcy by the trustee.
Examinable Affairs – In relation to a person, means the person’s dealings, transactions, property and affairs and the financial affairs of an associated entity of the person in so far as they are or appear to be, relevant to the person or to any of his or her conduct, dealings, transactions, property and affairs. Basically it means that the trustee can look at anything going back five years in bankruptcy
Exempt Assets – Assets/property which cannot be sold in bankruptcy by the trustee. These are identified in s116 of the Bankruptcy Act.
Extension of Bankruptcy – If a bankrupt fails to co-operate with their trustee, or fails to meet the requirements of the Bankruptcy Act, their bankruptcy can be extended to a five or eight year period from the date they file their Statement of Affairs with AFSA through the Official Receiver. In certain circumstances, the period of bankruptcy does not commence until a bankrupt returns to Australia.
Foreclosure – Is the legal proceeding in which a creditor enforces their security over the collateral used for a secured loan. Generally this is used to refer to the sale of a house by the Mortgagee or lender.
Garnishee – An automatic deduction arranged without a person’s consent from their income or bank account due to non payment of a debt. A trustee in bankruptcy can garnishee income or monies held by third parties on behalf of a bankrupt, where the bankrupt has been assessed as liable to pay a sum of money from their income in their bankruptcy and fail to make payments.
Household Property – Items that a bankrupt is able to retain when they become a bankrupt. A list of items can be found in Bankruptcy Regulation 6.03.
Income Contributions – A sum of money that a person in bankruptcy is required to regularly pay to their trustee from their income. It is normally called a compulsory contribution and is calculated using Pages a statute-based formula.
Insolvent – A person is considered to be insolvent when they are unable to pay their debts as and when they fall due.
ITSA (Now called AFSA) – ITSA stood for the Insolvency and Trustee Service, Australia. It was the Commonwealth Government agency that becomes the trustee when a private bankruptcy trustee is not appointed in a bankruptcy or other arrangement under the Bankruptcy Act. It oversaw the Bankruptcy Act in Australia including Debt Agreements and Personal Insolvency Agreements.
Joint Debts – When two (or more) people together borrow money or incur a debt, it is a joint debt. Unless the contract specifically limits the amount each of you must pay, a creditor can recover payment of the whole amount from whichever of you is able to pay. This is called ‘joint and individual liability’. Get legal advice before you agree to any joint contracts, debts or debt consoliation loans
The creditor’s right to do this is not affected by any private agreement you might have with the other debtor about who will pay, unless the creditor has also agreed to the arrangement. This applies even if a court has approved the agreement, for example, a family law property agreement.
Judgments – A Judgment or Judgment Debt is awarded by the court. The court has judged that you do owe the money. The creditor that was been awarded the debt has 12 years to enforce their judgment. It is recorded on your credit history for five years.
Legal Action – Refers only to actions through the court. Unless the creditor has lodged a Statement of Claim with a court, legal action has not commenced. Frequently debtors assume that a Letter of Demand is legal action though it has not been issued by a court.
Lender – An indvidual or institution that provides money to a debtor that the debtor does not own, in return for repayment of the orignal sum plus interest over time. This is commonly referred to as a loan. Reasons for borrowing may include business, debt consolidation, mortgages, or investment.
Non-Conforming Lender – A lender who issues mortgages to borrowers who do not meet mainstream lenders guidelines. This may be for purchasing property, or for debt consolidation through refinancing. Non conforming borrowers have poor credit histories and are more likely not to pay the money back, such as those who have a history of not paying loans back, or those with a recorded bankruptcy.
Non-Divisible Asset – An asset that can not be sold under bankruptcy. This generally refers to property exempted under the bankruptcy act.
NPII – National Personal Insolvency Index. It is a computerised database of all personal insolvencies (including Debt Agreements, Bankruptcies and Personal Insolvency Agreements) in Australia, both past and present.
Official Receiver – Is a person who administers statutory functions under the Bankruptcy Act for the government/AFSA. The functions performed are different to those of a trustee.
Overdue Account – Also known as a Defaults, an overdue account is a negative entry on a credit history. They can be lodged by a creditor when a debt is more than 60 days overdue. These are unable to be removed from credit histories and lapse after five years.
Pay Day Lender – Lenders who provide small, short-term loans that are intended to cover the debtor’s expenses until the next pay day, or cover some other unforseen expense. Payday lenders are often criticised for exploiting financial hardship and charging high interest rates. For example, a debtor may borrow $100 and repay $125 the next fortnight. This is an annual interest rate of 650%
Personal Insolvency Agreements
Preferential Payment – Arises where a bankrupt prior to their bankruptcy has paid one or more creditors money or transferred an asset to them in priority to other creditors. A trustee can claw back this transaction once they establish five criteria, to enable all creditors to share in that money.
Prescribed Information – Information that MUST be read by a debtor before making an application for bankruptcy or submitting a proposal to AFSA for a Debt Agreement under the Bankruptcy Act.
Proposal to Vary The Agreement – If after having a Debt Agreement approved by their creditors, a debtor’s financial situation changes and they wish to vary the Agreement to change the terms, their Debt Agreement Administrator may lodge a Proposal to vary the Agreement.
Protected MoneyMoney that cannot be claimed by a trustee in bankruptcy e.g. personal compensation money paid or payable for an injury, or certain government grants.
Provable Debt – An amount that a creditor is entitled to claim for in a bankruptcy to participate in any distribution that may arise by way of a dividend.
Registered Trustee – A person who is registered with AFSA to be a trustee of bankruptcy and Personal Insolvency Agreements. They are generally accountants and perform a type of apprenticeship under a licenced trustee before they can be a trustee themselves.
Rent to Buy – An informal term for a type of business which rents assets or items, most typically furniture or appliances, with the condition that the item will be owned by the renter if the term of rent is finished, or that the lease can be converted to a sale for a nominal fee at that time. Since rent to own stores often do not require payment up front, they are popular with the poor, but between high interest rates and higher cash prices than other stores, they are more expensive (often several times more expensive) than buying the same item outright. This has caused the rent to own industry to be accused of predatory lending.
Secured DebtsA loan where the debtor uses an asset as collateral or security for the loan. The loan is therefore secured against the asset. In the event that the borrower defaults on the payment, the creditor can take possession of the asset used as security. If the asset used as security is sold and the proceeds of the sale are not enough to repay the loan, the debtor is responsible to pay the shortfall. There a generally two types of secured debts; Mortgages and Car Loans. However, any loan may become secured if the creditor secures by contractual agreement the property of debtor as collateral. Many Payday Lenders take security over vehicles and household furniture. Secured debts are unable to be included in either Debt Agreements or Personal Insolvency Agreements.
Security – A term used for any asset that a debtor uses as collateral for a loan. Creditors will often want security for a Debt Consolidation Loan. A creditor has the right to foreclose on this asset in the event that the debtor defaults on the loan.
Selling Debts – One option for a creditor to collect on an overdue account is to sell a debt to a professional debt collection company. The debt collector will pay a small percentage for the debt but will be able to collect on the full amount. The benefit to the initial owner of the debt is that they recieve instant cash for a debt they were unlikely to collect on. May also be referred to as charging off.
Sequestration Order – An order made before a Federal Court Registrar, a Federal Magistrate, or a Federal Court Judge, making a person bankrupt based on a Creditor’s Petition or other application as outlined under the Bankruptcy Act.
Shortfall – The difference between the value of an asset and a loan it is used as security for. Due to accounting convention the value is always the current market value of an asset. If the creditor has to foreclose on the asset they will sell the asset at auction; the debtor will then owe the creditor the difference between what was owed and the money received from auctioning the asset. Example: John has a car loan for $10 000; the car is worth $5000. If he were to sell it today, the short fall would be $5000.
Summons – A document that informs a person that legal proceedings have been started against them. The summons will provide a date that defendant(s) must appear in court or respond in writing to the court. Examples are Statements of Claim and Examination Notices.
Termination – Refers to the conclusion of a Debt Agreement or a Personal Insolvency Agreement where the conditions of the agreement have not been met. A Debt Agreement can be either terminated by the Official Receiver, the debtor or by a vote of creditors. A Debt Agreement adminstrator can not terminate an agreement. The administrator may however recommend to creditors that the agreement be terminated. Once an agreement is terminated the creditors are able to resume collection activity.
Unsecured Debt – A debt with no collateral secured against it. In the event that the debtor defaults on the loan, there is no collateral to foreclose on. There are three principal types of unsecured debts: Credit Cards, Personal Loans, and some debt consolidation loans. Generally, unsecured creditors rights are secondary to secured creditors in a bankrupt estate as secured creditors still retain their right of foreclosure which may return to them a higher rate of return than unsecured creditors.
Voting Period – Creditors have 5 weeks to decide if they will accept a Debt Agreement. This is referred to as the Voting Period. During this time, contact with the debtor, collection activity, enforcement activity and the charging of interest is prohibited.
Writ – A formal written order issued by the court. It is an enforcement order made against a debtor by a creditor for the foreclosure and sale of a debtor’s assets. Writs affect any asset not protected under the Bankruptcy Act.