Bill introduced to reduce default bankruptcy period

The Bill to reduce the default period of bankruptcy from three years to one year was introduced into Federal Parliament last month. This comes as part of the reforms recommended by the Productivity Commission in 2015 and adopted in the Federal Government’s National Innovation and Science Agenda designed to encourage entrepreneurial activity and reduce the negative stigma associated with bankruptcy.

As summarised by ARITA, some of the Bill’s features include:

  • A bankrupt will be discharged 1 year from the date of filing his or her statement of affairs. The 1-year discharge will commence 6 months after the Bill receives Royal Assent to allow for trustees and agencies to prepare for or object to individual discharges.
  • Income contributions will still continue for at least two years after discharge from bankruptcy and this can be extended for non-compliance
  • Other bankruptcy restrictions will be reduced to 1 year such as: restrictions on overseas travel, the obligation to disclose bankruptcy when applying for credit, restrictions on being a company director and being employed in certain professions.
  • There will be no change to the ability of a trustee or the Official Receiver to lodge an objection to discharge.

Our view is that these incoming laws will favour debtors over creditors and could complicate recovery processes for trustees in bankrupt estates, particularly given the inconsistencies with income contributions continuing 2 years after discharge. With the majority of bankruptcies in Australia relating to consumer debt, it remains to be seen whether these reforms will encourage entrepreneurship as intended.  With such a short bankruptcy period, this could also spell the end for Part X Personal Insolvency Agreements and Part IX Debt Agreements.

For more information on how this Bill, please contact us.

This article was written by Nathanael Kitingan, Special Counsel – Litigation & Dispute Resolution (Insolvency).