Overview
On 8 July 2024, the Attorney-General’s Department announced a series of proposed amendments to the Bankruptcy Act 1966 (Cth) to ensure Australia’s bankruptcy system is fairer and operates in the best interest of all Australians.
These proposed reforms to Australia’s bankruptcy laws were drafted after an extensive roundtable consultation with key stakeholders from various sectors, representing both debtor and creditor interests. The reforms aim to reduce stigma and promote entrepreneurship.
The key changes to the bankruptcy laws include the following:
1. Increasing the involuntary bankruptcy (creditor petition) threshold from $10,000 to $20,000 (with indexation applied each year).
The $20,000 threshold was trialled during the pandemic, with positive results. This reform will reduce the volume of low-debt bankruptcies and will provide more breathing space for debtors navigating financial difficulty during a challenging economic climate. This reform will likely trigger a change in the lending practices of credit providers (e.g. reduced availability of credit, higher interest rates and collateral requirements).
2. Changing the bankruptcy notice response period from 21 days to 28 days.
Increasing this period will give the debtor more time to obtain advice concerning their financial position and negotiate an agreement with creditors.
3. Proposal or acceptance of a debt agreement will no longer be an “act of bankruptcy” for the purposes of s 40(1) of the Bankruptcy Act.
This amendment will prevent creditors from petitioning the debtors’ bankruptcy if the debt agreement fails or is somehow incomplete. This will provide greater flexibility for the debtor to negotiate, knowing they won’t be automatically exposed to bankruptcy proceedings.
4. Changes to the National Personal Insolvency Index, making the official record of a discharged bankrupt publicly available for only 7 years (the record is currently permanent).
This proposed reform aims to reduce the punitive nature and stigma associated with bankruptcy. Reducing the record period also aligns more closely with standard credit reporting practices (two years starting from the day bankruptcy ends).
Other Models being Considered
1. Shorter Discharge Period
Our current bankruptcy system is for a minimum three (3) years. For some time now, consideration has been given as to whether the default discharge period for bankrupt should remain at 3 years or be reduced to 1 year.
2. International Models
The New Zealand model has been considered as an option for Australia to consider which provides an alternative personal insolvency option that allows a person with debts of between $1,000 NZD (New Zealand’s bankruptcy threshold) and $50,000 NZD and who holds no realisable assets to be cleared of their debts. The No Asset Procedure is less restrictive than bankruptcy and usually lasts for one (1) year. A person is only able to enter into a No Asset Procedure once.
The proposed Minimal Asset Procedure
An option being considered at present under Australian bankruptcy law reform is the Minimal Asset Procedure.
Government has considered Australia’s existing personal insolvency system in addition to numerous overseas models and considers the following to be potential elements of a Minimal Asset Procedure in Australia:
- there be a maximum debt threshold of $50,000 to enter the Minimal Asset Procedure;
- the Minimal Asset Procedure would last for 12 months, with a period of 4 years post-discharge to be listed on the National Personal Insolvency Index;
- a maximum threshold for income would be determined for eligibility for entry into a Minimal Asset Procedure;
- a maximum threshold of $10,000 in assets with exceptions for tools of trade and a vehicle to be eligible for entry into a Minimal Asset Procedure;
- a debtor may only enter into a Minimal Asset Procedure once during their lifetime, and
- a Minimal Asset Procedure should be less onerous than a bankruptcy.
We will closely monitor these reforms and any bills to be introduced into Parliament. At the time of writing this article, we understand that submissions are still being considered.
Article written by Michael Carrafa (Executive Director) – Melbourne