Drive Thru Bankruptcies - Stop Press - Urgent Update
In the July/August 2016 edition, I wrote about the prospect of 1-year bankruptcies being announced as part of the (1) Productivity Commission's Report to the Federal Government on 7 December 2015. The 1-year proposal was announced as part of the National Science & Innovation Agenda and then subject of a (2) Proposal Paper in April 2016. So, what's the update?
On 19 October 2017 the Bankruptcy Amendment (Enterprise Incentives) Bill 2017 was read for a 2nd time in the Senate. I think it is likely the legislation will be passed and receive Royal Assent by the end of 2017 (absent of other major distractions for Federal Parliament!). Importantly this would likely see the start date to be around July 2018. Let's go through what this all means.
• The bankruptcy period will be reduced from the present 3 years to 1 year.
• Current provisions relating to vesting of assets at the date of bankruptcy will not change - thereby effectively maintaining the inability of an individual to continue to hold certain assets post-bankruptcy that presently exists.
• The bankrupt will still be assessed for any potential liability for compulsory income contributions for 3 years - typically undertaken on an annual basis - notwithstanding the reduction in the bankruptcy period. The Bill will introduce legislative amendments to require on-going assistance and compliance by the bankrupt during years 2 and 3 notwithstanding that they may have been discharged.
Items 2 and 3 should provide some comfort to creditors to know that the Bankruptcy Trustee's powers to make recoveries for creditors has significantly not been undermined by the proposed Bill. That is positive. However, the reduction period still invokes much discussion about whether it is a sufficient deterrent for individuals that incur debt.
What will it mean for an individual considering bankruptcy?
In addition to the above points, the following aspects represent positive changes for individuals that are in financial distress:
• They will only need to seek permission of their Bankruptcy Trustee for 1 year instead of 3 years regarding obtaining consent to travel overseas.
• They will be able to re-engage in corporate activity sooner, by way of directorships and the like - i.e. after 1 year, should they wish to.
• They will also be able to more readily make a "fresh start" because of the reduced bankruptcy term. For example, the accumulation of assets can occur after 1 year without concern that it will be viewed as an asset that could otherwise be available to their Bankruptcy Trustee.
• It will also enable the individual to start to re-build their credit score and enable them to seek credit over the prescribed amount without obligation to actively disclose their bankruptcy.
One aspect that is hoped to be achieved is that it will encourage more entrepreneurial activity. As previously highlighted, given that only about 25% of bankruptcies appear to be business related, I am not entirely sure that this objective will be met. However, importantly I do not believe that the changes will materially undermine the outcomes for creditors (in terms of recoveries), whilst at the same time achieving some reduction in the stigma that can be associated with bankruptcy and in the bankrupt re-establishing themselves.
Hopefully such changes will enable individuals facing financial difficulty to be not as easily swayed by seductive and slick marketing material (print or on-line) into other alternatives which actually don’t always live up to what was envisaged. For example, Part IX debt agreements which often run for 5 to 6-year periods do not provide the fresh start required by the individual.
As a Bankruptcy Trustee, I have followed this reform closely and would welcome any enquiry about it or indeed other aspects of personal insolvency and how those in financial crisis can legitimately re-take control of their affairs by getting proper advice.
by Bruce Gleeson