Changes to bankruptcy laws – a bonus for the struggling

In these difficult financial times, insolvency is expected to increase. In a recent discussion paper, the Attorney-General’s Department has outlined the proposed amendments to the Bankruptcy Act (Cth) 1966 which are due to be introduced into Federal Parliament in June 2009 and which may give some hope to both debtors and creditors.

The relevant proposals for reform include:

1. an extension of the 7 day moratorium to 28 days

   It is thought that additional time to file a simple statement of affairs with a declaration of intent to file a debtor’s petition (the application for a voluntary bankruptcy) will allow debtors to seek proper information and advice about all their options and give creditors time to be proactive in contacting the debtor to negotiate alternative arrangements.

2. a maximum bankruptcy period of 12 months for first time bankrupts with the possibility of earlier discharge
   
   The current usual period of bankruptcy is three years, with possible extensions to five or eight years where the trustee objects to discharge on the basis of the bankrupt’s conduct prior to and during the bankruptcy.

   It is thought that a shorter period of up to 12 months is sufficient to enable the trustee to identify the assets and debts, determine any liability to make income contributions and develop a plan to administer the estate. The prospect of even earlier discharge will encourage bankrupts to cooperate with the trustee and the retention of the ability of the trustee to object to the earlier discharge will discourage improper conduct by bankrupts.

3. bankrupts with income would be required to make contributions beyond discharge

   So that the shorter bankruptcy period is not seen to be an easy option, bankrupts with income will still be required to make contributions beyond the discharge of their bankruptcy, for up to three years.

4. a review as to whether the National Personal Insolvency Index should continue to be a permanent public record

   The National Personal Insolvency Index is a permanent public record of bankruptcy which can be accessed by anyone for a fee. The necessity for this record to be permanent is to be reviewed. While this is positive for bankrupts seeking to make a fresh start, it is disadvantageous to any persons considering lending to the discharged bankrupt whose past failures may otherwise be a deterrent to lending.

5. an increase the minimum debt for a creditor’s petition to $10,000, from $2,000
   
   It is believed that some creditors use bankruptcy as a means of enforcing payment of very small debts, often incurring trustee’s fees which are many times the amount of the original debt. To reduce this, it is proposed that the minimum debt be increased to $10,000.
6. A 20% increase in the debt, income and asset thresholds for eligibility for debt agreements

   A debt agreement is a voluntary agreement between a debtor and creditors proposed by the debtor and are intended as an alternative to bankruptcy for low income debtors. However, there are minimum statutory thresholds which determine eligibility. Currently, a debt agreement can be proposed by a debtor who has:

• not been bankrupt, utilised a debt agreement or given an authority under section 188 of the Bankruptcy Act in the last 10 years;
• after tax income of less than $62,735.40; and;
• unsecured debts of less than $83,647.20.

These amounts are updated 6 monthly, indexed to CPI. It is suggested that the debt and income thresholds for eligibility for debt agreements be increased by 20% to make debt agreements more widely available.

If passed, these reforms are good news for both debtors and creditors.

Debtors will have 28 days in which to seek proper legal advice and consider all their options, including whether a debt agreement could be in their best interests.  For a first time bankrupt, the period could be as little as 12 months or even less.

For creditors, while on one hand you may not be able to bankrupt a debtor for less than $10,000, you may be able to continue to obtain contributions from them after they are discharged.  Alternatively, you may be able to enter into a debt agreement with the debtor and not have to go through bankruptcy proceedings.

Either way, Mason Sier Turnbull can advise you as to the best path to take.

Author: Louise Wolf