Disrupting Bankruptcy? Change from three to one year period.


Disrupting Bankruptcy? Change from three to one year period.

The period of time during which a person remains bankrupt is being reduced from three years to one. But while most of the restrictions of being bankrupt will be removed after one year, some will remain; in particular the obligation to continue to pay contributions from income for the full three years. 

The changes to the Bankruptcy Act[1] itself are quite minimal, with the main change being that Section 149 will refer to one year rather than three as being the minimum period of bankruptcy.

Apart from the obligation to continue to pay contributions for the full three years, for practical reasons, after one year a person will no longer be in bankruptcy. Restrictions on overseas travel, on obtaining credit, on being a company director and on certain professional and other licenses will all be lifted.

This change will most certainly happen and the aim of this information is to help advise and prepare clients for any implications.

We should start by acknowledging that this change can be viewed as having some positives, such as:

  • Leaving a person in the constraints of bankruptcy for a full three-year period is out of kilter with modern approaches to unpaid debt;
  • Regulations of bankrupt persons, over a three-year period, involves a considerable cost to creditors and to the community. There are economic benefits in having them discharged after a shorter period, and allowing them to participate fully in economic life;
  • There is an undue stigma attached to bankruptcy, especially when seen in the context of unpaid debt in the corporate sphere, where directors are generally protected by their limited liability.

Cause for concern?

The proposed change has also raised concerns on two points connected with the reduction of the bankruptcy period:

  • If a bankrupt inherits property during their bankruptcy, it belongs to the Trustee. If the inheritance occurs after bankruptcy, the former bankrupt can keep it. With bankruptcy now only lasting one year, there may well be such windfalls in the second and third years that the creditors will miss out on.
  • Under the current law, bankrupts are required to pay contributions from their income for the full three years, if it is above a certain threshold (currently a minimum of around $56,674.80 for bankrupts without any dependants). Under the new law, despite that person’s bankruptcy ending after one year, they will still be required to pay those contributions for the remaining two years. The concern is that once a person is out of their bankruptcy, the Trustee will have less authority to enforce income contribution compliance over the following two years.  For example by way of various powers to enforce compliance, including to extend the period of bankruptcy by way of an ‘objection to discharge’.

There are some additional provisions in the law to assist Trustees in enforcing payment:

  • A stronger requirement for discharged bankrupts to keep in touch with their Trustees by way of notifying any change in contact details. Any breach of that requirement involves a serious penalty;
  • The continuation of the supervised bank account regime, which can be used by Trustees to collect outstanding payments, even after discharge;
  • The requirement for former bankrupts to keep and provide, for the full three years, details recording their income, employment, financial transactions and other dealings.

Accounting and tax advisers with clients who have been through bankruptcy should be particularly aware of this last requirement.

The bankrupt estate

The ‘bankrupt estate’ which the Trustee administers, is considered separately from the bankrupt person. It is important to point out that a Trustee has always been able to carry out investigations, asset recovery proceedings and the sale of assets after a bankrupt’s discharge within certain time frames. In the proposed amendments there is no change to the law in terms of the period of time by which an estate must be administered and finalised.

How will the transition be made?

The default one-year bankruptcy period will commence on a nominated day, which has yet to be announced. If we assume that it is 1 September 2018, on that day all bankruptcies then on foot for over one year, except those subject to an objection to discharge, will be discharged. Remaining bankruptcies will be discharged after one year.

For this reason, there would be no point in delaying bankruptcy until the new law comes into effect. Whenever bankruptcy occurs, under the new law, it will be limited to a period of one year.

In the future

The changes in bankruptcy law will most certainly happen; Trustees and creditors must accept that. In the longer term, we consider that further changes will be necessary.  One possible change is to reduce the time period during which a debtor and/or bankrupt will be listed on credit rating agencies’ databases. The current period is generally five years, we suggest it should be reduced to three years.

This change would assist the anticipated positive effects of one year bankruptcy to flow into the economy.

Anyone being pursued by creditors, or contemplating bankruptcy should know that bankruptcy is not the only option. There are other avenues available under the law; including debt agreements under Part IX of the Bankruptcy Act, which is also subject to Government reform.

In any case, the decision to declare bankruptcy is one that should never be made before seeking advice.

If you would like advice or if you would just like to discuss any of the above, please call the dVT Group on 02 9633 3333.  

[1] The Bill is before Parliament; this article is written on the assumption that it will become law.