Bankruptcy reforms: negotiating a fine balance

The Federal Government has proposed a suite of changes to bankruptcy law, designed to balance the rights of creditors while reducing the stigma associated with the process.

The proposed changes follow a round-table last year convened by the Attorney-General that aimed to give stakeholders a chance to be involved in personal insolvency law reform.

The key reforms announced include:

• Increasing the threshold for involuntary bankruptcies from $10,000 to $20,000, with the threshold to be indexed each year.
• Increasing the timeframe in which a debtor may respond to a bankruptcy notice from 21 days to 28 days.
• Reducing the period a discharged bankruptcy is publicly recorded on the National Personal Insolvency Index (NPII) to seven years following discharge from bankruptcy.
• Removing the proposal, or acceptance, of a debt agreement as an act of bankruptcy for the purposes of subsection 40(1) of the Bankruptcy Act.

The federal government is also consulting on the introduction of a “mini-bankruptcy regime” called a “Minimal Asset Procedure”, which aims to clear the debts of a person who meets certain criteria sooner, allowing them to start afresh earlier than a bankruptcy allows. The Minimal Asset Procedure is not expected to leave creditors worse off. Under the proposal, those who owe less than $50,000 and have minimal assets to repay their debts would be able to participate in the procedure, which is designed to be less restrictive than bankruptcy and would last for one year – as opposed to the current three years.

Bankruptcy remains a pressing issue. The June quarter 2024 personal insolvency figures from AFSA show that during the quarter, 2,947 people entered into a formal personal insolvency – up from 2,705 in June 2023. Just over a quarter (793) were business related, up from 730 in the previous corresponding period. The June 2024 quarter comprises 1,704 bankruptcies, 1,181 debt agreements, and 61 personal insolvency agreements.

Not all reforms welcomed

Jirsch Sutherland Partner and Bankruptcy Trustee Stewart Free says some of the reforms are welcome, in particular, the Minimal Asset Procedure, which “appears to be trying to mirror the SBR (Small Business Restructuring) process in the corporate environment”, he says.  “This would be dealt with almost exclusively by the Official Receiver at AFSA as there would be little economic sense for someone to engage a private trustee.”

But Free doesn’t welcome all the reforms. “I feel increasing the threshold to $20,000 cuts out a lot of creditors who would see a benefit in pursuing the debt and bringing matters to a head,” he says. “Also, I don’t see any reason why the time limit to respond to a bankruptcy notice should be extended to 28 days.”

As to whether the reforms are likely to be effective, Free says that the 25 per cent of bankruptcies that are business related are unlikely to be affected. “Also, I cannot see the reasoning behind the assertion that creditors would not be worse off under the reforms,” he says. “If they cannot pursue the debt owed to them, then what remedies do they have?”

Fellow Jirsch Sutherland Partner and Bankruptcy Trustee, Malcolm Howell, agrees with many of Free’s points. “I don’t believe making it harder to bankrupt someone will assist the business world in any way,” he says. “Why should businesses suffer from people who think it is okay not to pay for goods and services, or who mismanage their financial affairs?”

He does agree with the reform to scrap debt agreements as an act of bankruptcy. “I actually think this is a good proposal,” Howell says. “People shouldn’t be penalised for endeavouring to deal with their debts.”

However, he feels the Minimal Asset Procedure is “useless”. “Many of the bankrupts I deal with refuse to disclose their assets,” he says. “They all say they have no assets, and we often find out that’s incorrect. Also, what happens to the bankruptcy if we find they have transferred their assets out. Should they be recovered?”

Both Free and Howell see little sense in the move to reduce the period a discharged bankruptcy is publicly recorded on the NPII to seven years. “There are private credit agencies that can maintain this information for longer,” says Howell. “So, it makes little difference unless the credit reference companies change their policy.”

Before taking any action, Free recommends you speak with a professional who can assist. “Jirsch Sutherland’s team of Bankruptcy Trustees can help by offering an obligation-free consultation to discuss your best course of action,” he says.