Reforming Personal Insolvency: A Preview of Australia's Proposed Bankruptcy Changes

Recently announced reform to the personal insolvency sector reduces the draconian effect of bankruptcy on individuals.

What is proposed?

On 8 July 2024, the Hon. Mark Dreyfus KC MP, Attorney-General of Australia, announced the Australian Government intends to reform Australia’s bankruptcy system. The proposed reforms include:

(a)  increasing the threshold for involuntary bankruptcies from $10,000 to $20,000, with the threshold to be indexed each year thereafter;

(b)  increasing the timeframe in which a debtor may respond to a bankruptcy notice from 21 days to 28 days;

(c)  reducing the period a discharged bankruptcy is publicly recorded on the National Personal Insolvency Index to seven years, following discharge from bankruptcy; and

(d)  removing the proposal, or acceptance, of a debt agreement as an act of bankruptcy for the purposes of subsection 40(1) of the Bankruptcy Act.

What more may be coming?

In addition to these key reforms, the Attorney-General’s Department has also commenced consultation on the introduction of a so-called ‘Minimal Asset Procedure’ in Australia.

The availability of non-traditional credit options such as ‘buy-now-pay-later’ options, combined with the rising cost of living, has contributed to an increasing cohort of debtors in financial distress that have minimal or no realisable assets and income. In these circumstances, creditors will not typically see a return through the bankruptcy process.

The proposed Minimum Asset Procedure would provide an alternative to bankruptcy where a debtor’s realisable assets do not exceed $10,000 (excluding tools of the trade and a vehicle), income does not exceed a maximum threshold (which remains to be determined) and the debt does not exceed $50,000.

Based on the success of the similar ‘No Asset Procedure’ in New Zealand, it is expected the Minimal Asset Procedure would be less onerous than bankruptcy. In particular, it would reduce the default 3-year discharge period for bankruptcy, to a period of just 12 months for the Minimal Asset Procedure.

How may this affect you?

If you are a business owner, these proposed changes are likely to affect you most when you seek to recover unpaid amounts from sole traders or the directors of entities who have provided personal guarantees at the time of goods or services being offered. In this context, the most significant changes set out in the proposed reforms on a practical level will be:

(a)  the significant increase in the quantum that must be outstanding in order for you to issue a bankruptcy notice (usually after obtaining a judgment); and

(b)  the likelihood that debtor-directors will be more willing to enter into debt agreements, as doing so will no longer be considered an act of bankruptcy.

Reform timeline

The Government has not yet released a timeline of when the reforms will be implemented. Due to this, it is likely they will not commence until (at the earliest) late 2024.

Should you have any questions in relation to personal insolvency please do not hesitate to contact our Directors, Aaron McDonald or Nick Malone, on their emails directly: aaron@pragma.law or nick@pragma.law.