Australia's banks say they are making major changes to the way debt can be sold to debt collection agencies, after "very disturbing" reports of poor practices in the industry.

Key points: Under the new guidelines, banks will no longer sell debts if a customer has an ongoing vulnerability

Under the new guidelines, banks will no longer sell debts if a customer has an ongoing vulnerability Debt collectors will have to consult the bank that sold them the debt before bankruptcy is initiated

Debt collectors will have to consult the bank that sold them the debt before bankruptcy is initiated The ABA has called on the Government to raise the forced bankruptcy threshold, which is currently $5,000

In August this year, the ABC revealed debt collection company Lion Finance was suing hundreds of people for bankruptcy to recover debts.

Debt collectors can legally sue to recover debts as little as $5,000, but consumer advocates were alarmed the tactic meant people were being dragged through the courts and risked losing their homes over small debts.

Now the Australian Banking Association (ABA) has launched a "major step up in safeguards", which it said would protect vulnerable customers.

ABA CEO Anna Bligh said the changes were designed to make poor practices "a thing of the past".

"There have been some publicly aired stories and others that consumer advocates have brought to our attention that are very disturbing," Ms Bligh said.

"Obviously, people that owe debts have an obligation to pay those back but it's important companies — whether they're banks or other companies — treat those people fairly, give them a reasonable chance to pay back their debt and take action that is appropriate to the size of the debt."

Under the new guidelines, banks will be required to proactively help customers find solutions before a debt is sold, such as restructuring, consolidation and hardship support.

If a bank sells a debt, the debt collector cannot move to forced bankruptcy without the permission of the bank.

Banks will no longer sell debts if a customer has an ongoing vulnerability and they cannot sell debt that is being disputed by a customer.

There will also be regular audits of all contracted debt collectors to ensure they meet the new guidelines.

Consumer groups say guidelines will clean up 'unethical' debt collection

Northern Territory parliamentarian Jeff Collins, who is also a lawyer, has been vocal in his calls for change to the debt collection industry.

Mr Collins defaulted on a credit card several years ago, and the balance of $5,950 was sold to debt collector Lion Finance.

Mr Collins was sued for bankruptcy by Lion Finance in 2017, after a dispute over an administrative change to a court-ordered instalment plan to pay off the debt.

"[It was] incredibly stressful," he said.

"You usually get into that situation with a fair amount of stress anyway, that's what leads you to that situation.

"In my case, there were various things going on in my life and … this just adds a completely new layer to that process."

Since he spoke publicly, Mr Collins said he had been contacted by people across Australia sharing their own stories.

"The common thread was that they had a dispute but they never felt that they were able to properly have that heard," he said.

"So a consultation process would certainly assist."

He had been hoping for swift changes, and said he was pleased banks would be forced to be proactive with helping customers before debts were sold.

Darwin politician Jeff Collins said he had heard from people across Australia who had been pursued by debt collectors. ( ABC News: Brendan Esposito )

"It's an area of consumer credit that really needs some review, just given the number of people who fall into those sorts of situations, and not by design," he said.

"Various things happen and people find themselves in those circumstances and nobody wants to be made bankrupt, nobody wants to go through that process, none of them want to get dragged to court."

Fiona Guthrie from Financial Counselling Australia, which consulted on the guidelines, said the new banking policy included important protections.

"This was a really urgent problem so we are really pleased to see these guidelines because they're addressing really shoddy, unfair and unethical debt collection," Ms Guthrie said.

"This is the first time that the industry has had a set of guidelines along these lines and it's important because these guidelines are going to address some unfair and unethical debt collection practices."

The ABA has also joined with consumer groups to ask the Government to review the $5,000 threshold for forced bankruptcy.

The Australian Banking Association's Anna Bligh said the new guidelines represented a major change. ( ABC News: Mary Lloyd )

"The issue of threshold is one for the Government," FCA's Ms Guthrie said.

"One of the things we're really pleased about is that the banking industry and the community sector have called on the Government to hold a review into this woefully low $5,000 current threshold for bankruptcy.

"Five thousand dollars to force someone into bankruptcy is just ridiculous.

"Our view is in light of today's credit, it should be $50,000."

Debt collectors say industry not 'surprised'

Alan Harries from the Australian Collectors and Debt Buyers Association said the new guidelines were a reflection of current practices between the banks and the debt buyers.

"I don't think either parties would be surprised by anything that's contained in the guidance," he said.

He said the system had been "evolving" for some time and banks were already taking greater responsibility for the debts they sold.

"It's in quite a number of the debt sales agreements and has been for a while now, so I see that just as ratification of existing practise."

In a statement, Lion Finance's parent company Collection House Limited said the debt collectors had increased the threshold for initiating forced bankruptcy proceedings to $20,000, from October this year.

"This threshold is well above the regulatory threshold of $5,000 and will significantly reduce the number of bankruptcy claims taken by Lion Finance," it said.

The company said it had also implemented additional approval requirements "so that no customer or customer who has instructed a financial counsellor will face a petition of bankruptcy from Lion Finance".