In October 2017 the Federal Parliament introduced the Bankruptcy Amendment Bill. This Bill proposes that the length of bankruptcy be reduced from three years to one year.
If passed, the legislation should come into effect in 2018. But what is the reasoning behind the proposed changes and, more importantly, what would one-year bankruptcy mean for you if you are struggling financially, facing bankruptcy, or already bankrupt?
Why reduce the length of bankruptcy?
The Australian Government believes that a change is necessary to remove the negative stigma of bankruptcy and to encourage risk-taking and entrepreneurship.
As part of the National Innovation & Science Agenda (Innovation Agenda), the introduction of one-year bankruptcy is designed to create a balance between encouragement of entrepreneurship and protection of creditors.
What are the key proposed changes?
The main amendment to the Bankruptcy Act (“the Act”) affects Section 149, which will read if amended:
“the bankrupt is discharged at the end of one year from the date on which the bankrupt filed his or her statement of affairs.”
Other time periods associated with bankruptcy will also be reduced to one year, such as:
- The obligation to disclose one’s status when applying for credit;
- The requirement to seek permission to travel overseas;
- The restriction on holding certain licenses (for example real estate agent’s licences, building licences in certain states and certain legal practicing certificate requirements in certain states);
- The restriction on being a company director.
A bankrupt would still be obligated to pay income contributions after discharge, for at least another two years. The requirement to pay income contributions would still run for up to five to eight years, should the bankruptcy be extended by the trustee.
When will the legislation come into effect?
The one-year bankruptcy legislation will commence six months after it receives Royal Assent.
This is to provide time for trustees to prepare for any objections to discharge and enable relevant agencies to consider whether a one-year licensing or professional restriction is appropriate for their purposes.
What happens to ongoing bankruptcies?
With the introduction of the legislation, current bankrupts will be discharged from bankruptcy either one year from the date they filed a Statement of Affairs or six months from the date which the legislation receives Royal Assent – whichever is later.
However, this will not apply to bankruptcies that have been, or are, extended as a result of a trustee filing an objection to discharge. These bankruptcies will still run for up to five to eight years.
What are the advantages of one-year bankruptcy?
The main advantages of the legislation are:
- A decrease in the stigma of bankruptcy;
- The ability for a bankrupt to start up a new business sooner (encouraging innovation) including starting up a business through a company;
- Lower costs for a trustee and the government in administering and overseeing bankruptcy matters;
- Greater earning potential for a bankrupt once discharged from bankruptcy – though there is still a requirement to pay income contributions for three years.
What are the disadvantages of the Bill?
The main disadvantages of the legislation are:
- The changes apply across the board to all bankrupts, even those whose business conduct should not be encouraged;
- A reduced term of bankruptcy could lead to excessive risk-taking and unwanted business and financial conduct;
- The trustee’s ability to recover after-acquired property will be reduced due to a one-year period;
- It may be difficult for a trustee to get a bankrupt to cooperate after he/she has been discharged.
What’s the next step?
If you are considering going bankrupt and would like to discuss the effects of bankruptcy and the options available to you, please don’t hesitate to get in touch with us.