Changes to Australia’s bankruptcy laws
Australia’s bankruptcy laws are facing extensive reforms in the near future. The Attorney-General, the Hon Mark Dreyfus KC MP, in a comprehensive review of Australia’s insolvency legislation, recently announced several bankruptcy law reforms that are aimed at improving the outcomes for individuals facing personal insolvency situations.
This article summarises some of the proposed key reforms following the Attorney General’s announcements.
Background
On 2 March 2023, a national roundtable was convened by the Attorney-General to allow for key stakeholders to identify the potential key areas for required bankruptcy reform.
Following the national roundtable, the Attorney-General identified four short term priorities to meaningfully improve the Australian personal insolvency system and progress amendments to the Bankruptcy Act 1966 (Cth) (Bankruptcy Act). These reforms are intended to ensure that Australia’s bankruptcy system is fairer and operates in the best interests of creditors in the personal insolvency system.
Bankruptcy law reforms
The key changes proposed by the Bankruptcy Law Reforms include:
|
Increased threshold for involuntary bankruptcies from $10,000 to $20,000, with the threshold to be indexed each year |
A creditor is able to commence involuntary bankruptcy proceedings by seeking to place a debtor into bankruptcy by demanding payment of a debt through service of a Bankruptcy Notice. The proceedings can only be commenced if the debtor has a certain amount of debt. In late 2020, the threshold for involuntary bankruptcies was increased from $5,000 to $10,000. During the Covid-19 pandemic, the threshold was temporarily increased to $20,000 in an attempt to alleviate financial strain and stabilise the rising rate of bankruptcies. The new reform proposes to permanently increase the threshold to $20,000, indexed each year, which would ultimately allow debtors more breathing room before their creditors can take court action. The increased threshold better aligns with the new economic era of high inflation, high and rising interest rates and intense cost of living pressures. |
|
Increase in timeframe for response to a Bankruptcy Notice from 21 days to 28 days |
A Bankruptcy Notice is a final demand requiring a debtor to pay their debts to a creditor. Currently, a debtor has 21 days to respond to a Bankruptcy Notice by paying the amount claimed in the notice, reaching an agreement with the creditor or making an application to set aside the notice. It is an act of bankruptcy if a debtor fails to comply with a Bankruptcy Notice, on which a creditor may rely to seek sequestration orders. The reforms propose an increase from 21 to 28 days for debtors to comply with a Bankruptcy Notice which is intended to alleviate some of the stress and difficulty for debtors in obtaining appropriate and timely advice about bankruptcy and a debtor’s options in response to the bankruptcy notice under the current 21-day period. |
|
Debt agreements no longer to be considered ‘an act of bankruptcy’ |
A debt agreement is an agreement between a debtor and creditors which allows for the debtor to negotiate to pay a percentage of their debts over time. Currently, under section 40(1) of the Bankruptcy Act the proposal of a debt agreement by a debtor is considered an act of bankruptcy. Under the reforms, an ‘act of bankruptcy’ is not taken to have occurred where a debtor submits a debt agreement proposal to the Official Receiver, or where a debt agreement proposal is accepted by creditors. This change is aimed at ensuring that bankruptcy remains an option of last resort and to encourage the settlement of debts without the need for bankruptcy proceedings. |
|
Reducing the period for which a discharged bankruptcy is recorded on the National Personal Insolvency Index to seven years |
Currently, a debtor’s name will remain permanently on the National Personal Insolvency Index public register, even though they are discharged from bankruptcy. The reforms propose to limit this listing on the public register to 7 years. It appears that the current default period of bankruptcy under section 149 of the Bankruptcy Act before a bankrupt is discharged from bankruptcy will remain at three years but a shorter discharge from bankruptcy has been identified as a long-term reform priority. This proposed reform, if accepted, is likely to be advantageous for discharged bankrupts when seeking future credit and other commercial ventures. |
Further consultation: Minimal Asset Procedure consultation
In addition to these proposed changes, the Attorney-General’s Department has begun consulting on introducing a Minimal Asset Procedure in Australia. The Minimal Asset Procedure offers low-income and low-asset debtors an alternative to bankruptcy, allowing for faster debt clearance while ensuring fairness to creditors.
The concept is modelled off a similar process in New Zealand known as the No Asset Procedure, where low-income and low-asset debtors are allowed to have their debts discharged more quickly.
The Minimal Asset Procedure is a process available for individuals to apply to participate in the procedure which is intended to be less onerous and restrictive than bankruptcy. In turn, this would likely avoid the disproportionate expense of complex bankruptcy processes for minimally valued estates with no or low assets from which trustee expenses may be recovered and debts may be repaid. The Minimal Asset Procedure is intended to last for only 12 months, with a period of 4 years post-discharge to be listed on the National Personal Insolvency Index. Eligibility for the Minimal Asset Procedure (in its proposed form) is as follows:
-
there would 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.
Public consultation for the Minimal Asset Procedure closed on 29 July 2024 and was open to all members of the public.
The consultation seeks to understand the feasibility, benefits and possible consequences of a Minimal Asset Procedure in an Australian insolvency context.
The proposed reforms will have wide ranging consequences (possibly both advantageous and disadvantageous) for our clients including trustees and individuals. However, at a high level, the proposed reforms aim to create a more balanced personal insolvency system by easing the burden of bankruptcy on small debtors and reducing the stigma associated with it. These changes are intended to help individuals facing personal insolvency recover more effectively, ultimately fostering economic activity. The crucial factor in assessing the reforms’ success will be whether they enable bankrupt individuals to make a fresh start while also safeguarding the interests of creditors.
We remain committed to keeping up to date with changes to Australia’s personal insolvency laws and will report further as developments occur.
Authors: Adam Cutri, David De Mestre and Rezwan Attai