The issue of non-government schools instigating bankruptcy proceedings against parents who fail to pay school fees is an unfortunate consequence of the ‘business’ side of the provision of education services.

An article in The Age reports on multiple non-government schools in Victoria that have initiated bankruptcy proceeding against parents. This trend is not new, as a Herald Sun report from 2011 demonstrates. Nor is the issue restricted to Victoria as the legal issues underpinning fee paying arrangements, being contract law, are common to all non-government schools in Australia and even internationally. The non-payment of fees also occurs in the government school system however the amount of fees owed is typically much lower than the amounts in the non-government sector.

Although schools who initiate bankruptcy proceedings against parents have been branded ‘heartless’ for doing so given the interests of the students involved, in reality, the payment of schools fees is subject to an agreement between the parents and the school which can be enforced in court if required.

How do the parties end up in Court?

Parents enter into a contract with a non-government school for the provision of educational services to their children in exchange for payment of fees to the school. It is well known that the cost of non-government schooling in Australia is expensive, with fees of up to $32,000 for a year 12 day student.  Boarding fees can greatly exceed this. Unexpected events in a family, such as unemployment or business issues, can mean that the payment of those fees becomes difficult or impossible for parents while their child is still at school. As a result, the parent ends up owing a ‘debt’ to the school.

For schools, not receiving expected fees may have flow-on effects on their ability to pay staff wages and other financial commitments such as equipment for classrooms. In this sense schools are at risk of non-payment of their debts to creditors.

Consequently, if parents are unable to pay that debt, they can be formally regarded as being personally ‘insolvent’ or bankrupt under Australian law. Bankruptcy proceedings are a form of debt recovery governed by the Bankruptcy Act 1966 (Cth) and are heard in the Federal Court.

Insolvency law and schools

A 2009 paper on the topic ‘Australian Education and the Operation of Insolvency Law‘ by Mary Wyburn of the University of Sydney provides a good explanation of how bankruptcy litigation in the school sector operates.

Essentially:

• bankruptcy can be used as a threat by both sides in debt recovery and either the debtor or the creditor can instigate bankruptcy proceedings;
• depending on the assets in the bankrupt estate and the relative statutory priorities of any other creditors, a creditor may end up with only a small part of the debt sought to be recovered; and
• there are alternatives to formal bankruptcy proceedings, being a personal insolvency agreement and a debt agreement; essentially formal arrangements made between the debtor and their creditors about repayment or a compromise of the debts.

For many schools, if parents fail to communicate or negotiate with respect to outstanding fees, formal bankruptcy proceedings may be their only resort.

Credit reporting and the Privacy Act

The issue of fee non-payment also raises issues under the Privacy Act 1988 (Cth) (Privacy Act). The ‘credit reporting’ provisions under the Privacy Act were introduced in 2014 and they can apply to schools who should be aware of their compliance obligations under that Act.

Under the recent Privacy Act reforms, any organisation who offers goods or services to individuals on terms where payment is deferred for more than seven days can be considered a ‘credit provider’ under the Act. Schools may be a credit provider under the payment terms included in their contract with parents.

As credit providers, schools must have in place practices, procedures and systems which are reasonable, given the size and complexity of the business, and are designed to meet their obligations under the Act, the Privacy Regulations 2013 and the Privacy (Credit Reporting) Code.

For example, a credit provider must have a ‘credit reporting policy’ which is publicly available and includes mandated information such as:

• what sort of credit information it collects;
• the purposes for collecting and holding the information; and
• how a person can access and correct the information held about them.

Lessons for schools

Court proceedings involving schools and parents can be emotional, stressful and costly.

Although The Age quotes Independent Schools Victoria chief executive Michelle Green as saying that schools only initiate bankruptcy proceedings in ‘extremely rare circumstances’ and when ‘substantial amounts of money were owed’, the fact that such proceedings are regular occurrences in the non-government school sector demonstrates the difficulties schools can face when confronted by ‘debt collection’ issues.

And before a debt collection issue proceeds to litigation, schools are also subject to other legal obligations such as ensuring that they handle ‘credit information’ about parents in accordance with the credit reporting provisions of the Privacy Act.

Schools should be aware of all legal consequences that may occur when fee-deferral options are given to parents and understand how the credit reporting provisions apply to them.