Australia’s Bankruptcy Law Overhaul: What You Need to Know About the Proposed Reforms

Attorney-General Mark Dreyfus recently stated that the personal insolvency laws in Australia are “not fit for purpose.” In a comprehensive review of insolvency legislation, Mr Dreyfus outlined several bankruptcy law reforms that are aimed at improving the outcomes for individuals facing personal insolvency situations.

The reforms focus on smaller bankrupt estates and seek to promote the resolution of debt-related disputes without the need for bankruptcy proceedings in circumstances where the total debt owed to creditors is a relatively small amount.

Key Bankruptcy Law Reforms

Debt agreements no longer 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 1966 (Cth) (‘Bankruptcy Act’) the proposal of a debt agreement by a debtor is considered an act of bankruptcy. Under the reforms, the proposal of a debt agreement will no longer be considered an act of bankruptcy. The 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.

Increase in the threshold for involuntary bankruptcy

Creditors are permitted to commence involuntary bankruptcy proceedings if they fear they won’t be paid. Such proceedings, which seek to place a debtor into bankruptcy by demanding payment of a debt through service of a bankruptcy notice, 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 attempt to alleviate financial strain and stabilise the rising rate of bankruptcies. The personal insolvency numbers dropped with an increase in the threshold and the new reform proposes to permanently increase the threshold to $20,000, indexed each year.

Increase in timeframe to respond to a Bankruptcy Notice

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.  The reforms propose an increase to 28 days for debtors to comply with a Bankruptcy Notice.

Limiting public exposure of Discharged Bankruptcies

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. Although it doesn’t change the process for credit reports, the reform is a further attempt to make the system fairer.

Further Proposed Reforms

Consultation for Minimal Asset Procedure

From 8 July until 29 July 2024, the Government will continue to consult on proposed reforms to the Bankruptcy Act, including consideration of a Minimal Asset Procedure (MAP). A MAP will potentially allow for low income/asset debtors to be discharged more quickly and efficiently. In the financial year of 2022, over a quarter of debtors facing bankruptcy had less than $10,000 in assets and $50,000 in liabilities, making this a key demographic for targeted reform.

Objectives

Currently under the Bankruptcy Act, a debtor can be discharged from unmanageable debts whilst allowing the realisation of their assets to be distributed to creditors. However, there remains the issue of bankruptcies of debtors with no assets available for realisation. In this circumstance bankruptcy may be considered a disproportionate consequence of the debtor’s position. A MAP will likely be less onerous on debtors, whilst having minimal impact on a creditors position who would likely not have received any return if the debtor became bankrupt in any event.

What will the Minimal Asset Procedure look like?

The proposed MAP involves a threshold for entry involving a maximum debt of $50,000 and a maximum asset allowance of $10,000. The MAP is to last for 12 months, with debtors only being allowed to enter the procedure once in their lifetime.

Key Takeaways

The reforms aim to balance Australia’s personal insolvency system and allow debtors “access to a fresh start”. The amendments have been proposed to reduce the onerousness of bankruptcy on small debtors, and the government has assessed international legislative models for direction. The key targets of the reforms are removing the stigma faced by bankrupts, and allowing individuals faced with personal insolvency situations to better recover – thereby promoting economic activity in the process. Whether the reforms will assist bankrupts to start afresh, while also balancing the interests of creditors will be the key consideration of their effectiveness going forward.