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Bankruptcy - It Will Never Be The Same Again


Steven Brown
Steven Brown

Bankruptcy goes back to Ancient Babylon. In England, the first recognised piece of legislation was the Statute of Bankrupts 1542. Bankrupts were criminals and the stated aim of the Act was to prevent "crafty debtors" escaping the realm.

Under the Insolvent Debtors (England) Act 1813, debtors were bonded to their creditors. Though bonded, a bankrupt could request release after 14 days in jail by taking an oath that their assets did not exceed £20, but if any of their creditors objected, they had to stay in jail until their debts were paid in full.

In the middle of the 19th century, attitudes towards bankruptcy changed. The law removed the criminal element of Bankruptcy. The stigma of losing everything remained. Whilst Bankrupt, a bankrupt can could not be involved in business and could not borrow money.

Since 1542 the law has treated bankrupts as:
•  criminals who were jailed until their debt was repaid
•  kept in bankruptcy for 14 years
•  later six years and
•  more recently in Australia three years.

There is set to be a further change.

On the 19th of October, 2017, Senator McGrath said that the Government is looking to reduce the default period of bankruptcy from three years to one year. He said: "Our current personal insolvency laws put too much focus on stigmatising and penalising failure. As part of the National Innovation and Science Agenda, this reform aims to promote entrepreneurship and innovation and to reduce the stigma associated with bankruptcy.

This reform is designed to foster entrepreneurial activity by reducing the negative effects that harsh bankruptcy laws may have on prospective entrepreneurs. Further, a reduced bankruptcy term will decrease the stigma associated with entering into bankruptcy by recognising the importance of giving bankrupts a 'fresh start'. This will encourage entrepreneurs to re-engage in business sooner and encourage people, who have previously been deterred by punitive bankruptcy laws, to pursue their own business ventures."

The Government opines that one year is sufficient time for the administration of the vast majority of bankruptcies. Currently, where more time is required, a trustee can continue to administer a bankruptcy after discharge. Continuing administration may occur for various reasons, including:
•   ongoing investigations
•   assets to be realised
•   outstanding income contributions, and
•   incomplete distribution of funds.

This safeguard will continue to operate to ensure trustees can properly administer a bankruptcy even after a bankrupt's one year discharge.

Currently, bankrupts are obligated to pay income contributions until discharge where their income exceeds the prescribed threshold. Part 1 of the Bill contains measures that extend income contribution obligations for discharged bankrupts for a minimum period of two years following discharge or, if bankruptcy is extended due to non-compliance, for five to eight years. This will ensure high-income earners do not abuse bankruptcy laws by reducing their income for a year, hiding their assets and incurring excessive debt.

The amendments in Part 2 of this Bill relate to the application and transitional arrangements. Commencement of these new provisions will occur six months after Royal Assent to allow trustees, debtors and creditors time to adjust to the new laws. It will give trustees time to object to discharge in cases of misconduct.

We have come a long way from Debtor's Prison to a new era of the one-year bankruptcy.

If you need more information on bankruptcy contact Steven Brown at Etienne Lawyers.


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