The one-year bankruptcy is back on the table – Possible personal insolvency reforms on the way in response to COVID-19

The Attorney-General’s Department is presently engaging in a stakeholder consultation process in relation to potential changes to the personal insolvency framework.   

In its discussion paper, the A-G’s Department raises the obvious and wide reaching financial challenges faced by individuals as a result of the COVID-19 pandemic.

In addition to the temporary alterations to the creditor-initiated bankruptcy process that were implemented in the early stages of the pandemic in March 2020, as I reported in this article  in January 2021, some permanent changes have been made. In my article it was also noted that the discussion paper also seeks stakeholder engagement on the following four areas of potential reform.

1. Default period of bankruptcy to be reduced from three years to one year

You may recall that this potential reform was initially tabled in 2015, but never really gained traction and essentially vanished from consciousness in the lead up to the 2019 federal election. It appears that COVID-19 has re-ignited the law makers’ interest in this area of potential legislative reform in readiness for the difficult times ahead.

The main driver behind reducing the default bankruptcy period is to foster entrepreneurialism and business re-engagement, and to reduce the stigma that comes with personal insolvency.    

The other measures that would go along with this potential update include –

• • Reducing the time periods that relate to –
    • Disclosing bankruptcy when applying for credit
    • Seeking permission to travel overseas
    • The attainment of certain licenses and registrations (such as holding a CA or CPA designation)                 

However, one element of bankruptcy that would remain unchanged is the liability of a bankrupt to income contributions (subject to certain thresholds), that would remain at three years (or longer term if the bankruptcy is extended).

It its submission to the A-G’s Department, the Australian Restructuring Insolvency and Turnaround Association said this reform should not be introduced in isolation and should rather be one element of a more comprehensive review of the bankruptcy regime. The submission from ARITA also noted a ‘simplified bankruptcy’ process would likely be beneficial and should also be explored, similar to the simplified liquidation reforms that have already been introduced in the corporate insolvency space from 1 January 2021.    

2. Debt Agreements

Debt Agreements apply to low income earners with assets below a statutory threshold and serve as an alternative to bankruptcy or a Personal Insolvency Agreement. Debt Agreements underwent major reforms as a result of the Debt Agreement Reform Act 2018, which served to –

• • • Strengthen the academic and professional competence standards of Debt Agreement Administrators
    • Bring about changes to debt agreement provisions in terms of content, length, variation and termination
    • Clarify the functions and powers of the Inspector General in respect of debt agreement administrations

The major updates that have been introduced from the 2018 reforms are as follows –

• • • A default three-year limit on the duration of debt agreements (unless certain exemptions apply that relate to interests in real property)
    • Doubling the eligibility asset ownership threshold from $113K to $226K to increase the proportion of debtors who can access the debt agreement process

The discussion paper seeks input as to how the Debt Agreement can be improved.

3. Personal Insolvency Agreements            

Compared to Debt Agreements, Personal Insolvency Agreements do not have any income, asset or debt threshold eligibility requirements and serve as an alternative to bankruptcy. A Personal Insolvency Agreement is typically centred on a debtor offering his or her creditors a greater return when compared with a bankruptcy. The process is timely and flexible; however they constituted only 0.8% of personal insolvency appointments between 2013 and 2019.

The reasons for this include –

• • • A relatively small population of individuals with the resources or access to external funds to offer an attractive and enhanced return to creditors
    • Costs of compliance from the perspective of the Controlling Trustee, particularly in respect of investigatory tasks in order to properly inform creditors on the merits of the debtor’s proposal, which can be prohibitive
    • Limited and inconsistent support from creditors   

The consultation process may produce some suggestions from stakeholders regarding how the Personal Insolvency Agreement regime may be improved to enhance its uptake by individuals in financial distress.  

4. Offence provisions

ARITA has raised potential reforms in this area as follows –

• • • In the event that the default bankruptcy term is reduced to one year, the ability for the Bankruptcy Trustee to object to an individual’s automatic discharge in circumstances of serial abuse of the bankruptcy process by non-compliant debtors
    • Expansion of the offence provisions to include untrustworthy pre-insolvency advisors who promote phoenix activity and creditor-defeating dispositions, matters that have been bought into force in the corporate insolvency space

You can read the A-G’s discussion paper in full here.

I will be watching this space with interest over the coming months and I will bring you further updates as they come to hand.

About the author

Greg Quin is a Partner and Registered Liquidator at HLB Mann Judd Insolvency WA and has been with the team for 12 years. Greg oversees the daily operations of the many insolvency appointments managed by the HLB Insolvency team and looks after the operations of the practice.

If you have any queries about insolvency matters, please feel free to contact Greg on 08 9215 7900, 0402 943 091 or via email to gquin@hlbinsol.com.au.