Personal insolvency numbers continue to decrease from the pre-pandemic era.  But 1-year bankruptcies are back for discussion.

As part of a larger economic response to the COVID-19 pandemic, since March 2020 the Australian Government introduced a number of temporary changes to bankruptcy law.

These changes included:

1.         increasing the timeframe for a debtor to respond to a bankruptcy notice;

2.         increasing the temporary debt protection period available to debtors; and

3.         increasing the debt threshold for enabling creditors to apply for a bankruptcy notice.

However, since 1 January 2021, the temporary changes ceased, and amendments have been made to permanently adjust the bankruptcy thresholds.  As the situation currently stands:

1.         the amount of time for an individual to respond to a bankruptcy notice is 21 days, reduced from the temporary 6 months;

2.         temporary debt protection now allows for a 21-day relief from creditors, rather than the previous six months; and

3.         the minimum amount of debt that can prompt bankruptcy (via a creditor’s petition) is now $10,000, rather than the temporary $20,000 limit (or the previous $5,000 limit).

The Government’s swift response to COVID-19 with respect to bankruptcy law has sparked debate between insolvency commentators – and begs the question of whether the former laws are in need of an update, particularly with respect to the 3-year term of bankruptcy.

AFSA, the Government regulator of bankruptcy, has since July 2019 been publishing fortnightly statistics of individuals entering into personal insolvency administrations, on a National basis. ‘Personal insolvency administrations’ comprise bankruptcies, Part IX ‘Debt Agreements’ and Part X ‘Personal Insolvency Agreements’.

The statistics reveal a sharp decline in the average number of personal insolvency administrations since the Government reforms kicked in:

Although this shows a significant decline from pre-pandemic levels, insolvency commentators suggest the numbers are likely to drastically increase in approximately 6-12 months, following the end of the effect of the Government’s economic incentives.

Some have argued that keeping the bankruptcy period at 3 years will present administrative challenges to insolvency firms and impose an unreasonably severe penalty on individuals who have been made bankrupt due to matters mostly outside of their control – namely the pandemic.

The talk of changes to the period for bankruptcy are not new, noting that the Bankruptcy Amendment (Enterprise Incentives) Bill was introduced to the Commonwealth Parliament in late 2017 in an attempt to reduce the bankruptcy term from 3 years to 1 year.

The primary considerations that halt suggestions for change have their basis from both ideological and practical standpoints.  Namely, bankruptcy should only be used as a last resort, after all other avenues for recovery have been exhausted.  It follows, that reducing the period to 1 year may cause creditors to see the process as common practice and utilise it as such.

Furthermore, reducing the timeframe may present an easy “out” for individuals who want to avoid paying their creditors, and as such, will fail to act as a deterrent.

This could put individuals at a great disadvantage, who may have previously been able to implement a Part IX ‘Debt Agreement’ or a Part X ‘Personal Insolvency Agreement’ to have their debts compromised.

In light of the above considerations, although it is important to consider the challenges faced by individuals facing economic turmoil in these tough times, a balanced approach to bankruptcy reform must be implemented to protect the needs of the creditors, and as a result, avoid insolvency contagion.