Australia is proposing to reduce the insolvency discharge period from three years to one year. The proposal was endorsed by the Senate’s Legal and Constitutional Affairs Legislation Committee in March under the Bankruptcy Amended (Enterprise Incentives) Bill 2017. One of the critics of these changes, CPA Australia, says that proposed changes could result in more harm than good
Major changes include the following:
- The discharged bankrupt may apply for credit without the need to disclose the bankruptcy upon completion of a one-year bankruptcy period.
- All bankruptcies will be discharged if they are more than one year upon commencement of these reforms.
- For discharged bankrupts, compulsory income contributions will continue for a minimum of two years following the discharge.
Changes in the bankruptcy discharge period have happened before under the Bankruptcy Act 1996, where it previously allowed for an early discharge after 12 months at the bankruptcy trustee’s discretion. However, in 2013 it was changed back to a three-year period as it was seen that the 12 month period only discouraged debtors from trying to enter into a payment arrangement with their creditors.
The government claims that by reducing the bankruptcy period, directors are more likely to give up their business and assets sooner resulting to a less damage to creditors and the community. However, willingly giving up a business or assets rarely happens in practice. In reality, directors will continue to hold on to what they see as theirs as long as they can because of the difficulty in replacing any lost assets. In fact, it is argued that reducing the insolvency period may have the reverse effect, as the reduced penalty may serve as an incentive to hold onto their business and assets even longer because a 12 months period is perceived as short and worth the risk.
John Winter, CEO of the Australian Restructuring Insolvency and Turnaround Association, urges all accountants who are dealing with clients in financial distress, to ensure that they get independent expert advice as to what the best personal and corporate insolvency options are. Doing a Google search and choosing the first people who come up on the list is not an effective approach, as these people are likely to be either an unregulated advisor or are trying to sell a product to convince people to spend more for their service but will do nothing to help them.
The Australian Financial Security Authority (AFSA) which regulates the personal insolvency system has provided a list of options as to how to deal with unmanageable debt.
To ensure that the right decision if being made to resolve the situation, a person should know about the following:
- Who can help and advise
A financial counsellor can help though this process. They will talk to you about your options and may talk to your creditors on your behalf. In addition, they can help you with budgeting and may refer you to other sources to get more assistance.
- Formal options under Bankruptcy Act 1966
There are four available formal options and each has serious consequences. You should research the following thoroughly and seek your own independent advice before making a decision:
This option provides temporary relief from being pursued by creditors while seeking help and deciding how to proceed.
Currently, lasts for 3 years and 1 day. At the end of this period you are released from most of your debts. But once the new law has passed, it will shorten to 1 year.
A binding agreement between you and your creditors to pay a sum you can afford.
An agreement between you and your creditor to pay an agreed amount in instalments or lump sum.