Reduced number of bankruptcies during Coronavirus. Is this good news and what happens come September?


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Reduced number of bankruptcies during Coronavirus. Is this good news and what happens come September?

Changes to the bankruptcy laws have kept creditors of individual debtors at bay, and government assistance has probably staved off the need for a debtor to voluntarily seek bankruptcy protection. This has created an environment of hibernation.  The focus is on what happens next!

In a time of economic crisis which we are experiencing, there has been an abundance of support and attention given to helping businesses experiencing financial difficulty.  However, for every one business that has been affected, there are hundreds if not thousands of people who have also been affected.  This can be due to one of several reasons such as loss of employment, the collapse of a business, as a result of illness or due to other pressures.

What are the numbers saying? 

The Australian Financial Security Authority, which administers the personal insolvency system, has been monitoring bankruptcy figures on a fortnightly basis since March 2020.  It reports that on average, between July 2019 and 22 March 2020, 844 people per fortnight became bankrupt or entered personal insolvency or a debt agreement. When we look at the numbers for the period 23 March to 31 May, right in the middle of COVID-19, the numbers are falling to as low as 586 for the fortnight, 18 May to 31 May.

This decline in numbers of personal insolvencies in Australia during Coronavirus appears to be good news.  It is most likely due to the high level of assistance given by the Australian government to help those suffering from the financial impact of the pandemic.  They are being assisted in getting through with support such as Job Keeper, rent relief, and repayment deferrals.

The ATO has also indicated that it is taking a more lenient approach to pursuing its debts owing in this environment.  This will inevitably change.

But the changes to the bankruptcy laws are only temporary, focused on assisting debtors get through the COVID-19 crisis.  It is more likely that creditors cannot petition for bankruptcy until later in the year, when many anticipate that insolvency numbers will increase after the assistance ends.

Coronavirus and changes to bankruptcy laws

These changes were made in three areas:

Bankruptcy Notice compliance period extended to 6 months and the threshold increased from $5000 to $20,000:

A Bankruptcy Notice is a formal demand on a debtor for payment to a creditor based on a final judgement or order in the amount of at least $5,000 obtained by that creditor. Previously, a debtor had 21 days to respond to a Bankruptcy Notice and if they failed to do so, the debtor committed an “act of bankruptcy “on which the creditor could base a Creditor’s Petition seeking a Sequestration Order against the debtor.

The threshold has been increased to $20,000 and the period for compliance has been extended to 6 months.  These changes applied to any notices issued on or after 25 March 2020.

From a creditor’s perspective, these changes are effectively preventing creditors pursuing bankruptcy petitions during this period, which means there will be fewer bankruptcies by way of court order.  As a consequence, debtors will be less inclined to seek their own bankruptcy at present.  These temporary measures will no doubt provide some relief to those debtors in financial hardship, but they are only temporary, and the debts in question remain owing.  It is not a panacea!

Come 25 September, all these restrictions on creditors will be removed; that is, unless the government decides to extend that 6-month period of grace.

Temporary debt protection:  Creditors are also further restrained form recovering their debts through what is termed temporary debt protection.

Those debtors experiencing financial difficulty can be proactive and apply to AFSA for “temporary debt protection” for a period of 21 days. This protection precludes unsecured creditors (including sheriffs) from taking enforcement action to recover the money, such as garnishing a debtor’s wages or having the sheriff seize their goods.

The 21-day period has also been increased to six months.

This provides the debtor with additional time to obtain advice, negotiate a payment plan with creditors or to consider formal insolvency options.

It is important to note that application for temporary debt protection is an act of bankruptcy and a creditor could consequently use it in order to make an application to the court to bankrupt a debtor.

The temporary debt protection does not apply to certain debts, such as child support payments, HELP debts or fines imposed by a court.

Again, this extended period is only temporary and when the 6 month time period ends, the temporary debt protection will offer a debtor only the original 21 days protection.

What happens come September?

While these changes are no doubt proving useful for debtors, they should not see this period merely as one of hibernation.  Debtors should use this period of time to try to sort out their financial difficulties.

The time will soon come when government assistance and the legal protections will end, in some cases, perhaps sooner. If an individual is experiencing financial difficulty, the key is not to wait until it’s too late to be in control of the process.  Obtaining early advice is crucial and can make the difference as to what options are available, with the view of getting the best outcome possible.

We at dVT understand that the recent months have been financially difficult for many people, in business and in their personal circumstances.  We are in unchartered waters and expert and individual advice will often be needed. Entering bankruptcy or any type of insolvency is a serious step for a person to take and is one that should not be made lightly, and there may be other options.

dVT Group has three bankruptcy trustees who work with all parties involved to achieve the best outcome possible.

Please call dVT to seek early advice in the form of a free initial discussion to consider and explain the options available and their consequences, 02 9633 3333 or mail@dvtgroup.com.au

Special thanks to Michael Murray for his contribution to this article.