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A timely review of the effectiveness of Australia's insolvency laws
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Bankruptcy reform in Australia
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“Bankruptcy” in the Australian vernacular refers to personal insolvency, it does not extend to corporates or other legal entities.
Australia’s personal insolvency laws have not been subject to a comprehensive review since the Harmer Report in 1988, the Australian COVID-19 moratoriums have now come to an end, and many Australians are currently experiencing financial stress on account of cost of living increases. In recognition of this, the Australian Attorney-General flagged in February this year that “urgent” change is required to Australia’s personal bankruptcy laws. A national roundtable was convened and the Attorney-General’s department will now consider the outcomes of that roundtable and potential reforms.
Bankruptcy Act: Overview
The Bankruptcy Act is the key piece of legislation in the Australian personal insolvency framework and also plays an important role in the Australian economy. It creates a framework offering individuals in severe financial stress to discharge unmanageable debts while providing for the realisation of available assets for distribution to creditors.
COVID-19 amendments to the Bankruptcy Act
In March 2020, the Australian Government made significant and temporary amendments to the Bankruptcy Act and Regulations, including:
- the minimum amount of debt that can trigger bankruptcy increased from $5,000 to $20,000;
- the amount of time to respond to a Bankruptcy Notice increased from 21 days to six months; and
- temporary debt protection increased from 21 days to six months.
On 1 January 2021, the bankruptcy threshold permanently changed to $10,000. The period of temporary debt protection and the amount of time to respond to a Bankruptcy Notice reverted to 21 days following the end of the temporary measures.
In January 2021, the Attorney-General undertook public consultation on possible changes to the bankruptcy system to inform its ongoing response to address the impacts of the COVID-19 pandemic. The majority of stakeholders submitted that COVID-19 should not be a driving impetus for reforms to the bankruptcy system and there needs to be a longer-term approach to reform.
Where we are at
In January 2023, Australian Financial Security Authority (AFSA) released a report which analysed insolvency data over the past 20 years. The report found that there had been a long-term decline in personal insolvency numbers due to changes to lending standards, the impact of the Hayne Royal Commission and amendments to the Bankruptcy Act.
On 2 March 2023, the Attorney-General convened a national roundtable on personal insolvency to identify reforms needed to Australia’s bankruptcy laws. The roundtable brought together 23 organisations from a wide range of sectors with an interest in personal insolvency. The priority issues identified were:
- increasing the bankruptcy threshold value from $10,000;
- options for a shorter discharge period from bankruptcy for some bankrupts;
- options for easier annulment for inappropriate bankruptcies
- increasing the period for a debtor to respond to a bankruptcy notice from 21 days; and
- options to identify and scope measures to address poor practice.
There were divergent opinions on whether the bankruptcy period should remain at three years or be reduced to one year. It was recognised that a one year bankruptcy may be insufficient time to administer complex estates or non-compliant bankrupts.
Once the Attorney-General has considered the reforms, it will work with AFSA to develop possible reforms for the Government to consider. While there is a demand from stakeholders for reform of our bankruptcy system, we should expect to encounter challenges. There are a variety of different stakeholders involved and, with changeovers in Government, it may take some time to see substantial changes.
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