Personal Insolvency Consultation

We do not support an increase in the bankruptcy threshold.

We don’t believe the proposal will alleviate cost-of-living pressures that have increased under the current economic environment. For many, mortgage stress is their leading financial concern. The amount of such debt is generally significantly higher than the proposed bankruptcy threshold.

While cost-of-living pressures are front-of-mind for many Australians, we are not seeing any data suggest a surge in personal insolvencies. The recent increase in bankruptcies shows them returning to their pre-Covid long-term average. We don’t expect that number to materially go above that average.

Impact on small business
We are concerned that increasing the bankruptcy threshold from $10,000 may impact lending confidence, especially for those small businesses selling on credit.

We note that the consultation paper shows only a small percentage of bankruptcies are for debts between $10,000 to $20,000. However, this data doesn’t show the impact that being able to petition for bankruptcy between those amounts has on payment (and thus avoiding the bankruptcy statistics).

It should also be noted that reducing the rights of businesses, particularly smaller business to recover debts may transfer financial stress onto them. Debts of up to $20,000 or $50,000 are not small for many small businesses. Increased difficulties collecting such debt may in turn place them in financial difficulty.

If the government decides to raise the threshold, we recommend a suitable transition period. Unlike during the pandemic, the economic circumstances are not so pressing as to justify a large immediate increase in the threshold.

Alternatives
We believe the best approach to assisting people experiencing financial distress is to encourage and support them to seek advice early from regulated advisers.

In our opinion, the key issue that the current economic circumstances raise is the unwillingness of many people in financial distress to seek advice early from regulated advisers. This is predominately because of the stigma associated to bankruptcy. This unfortunately increases the probability of a person being placed into bankruptcy.

Lifting the bankruptcy threshold does not address this fundamental issue. Raising the threshold may also have the unintended consequence of encouraging some people with smaller debts to further delay action. This is detrimental to the debtor and their creditors.

We recommend that the government prioritise encouraging and supporting those in financial distress to seek out regulated advisers early. Any messaging from government, its agencies and others should emphasise the value of early advice from regulated advisers and to avoid those that are unregulated.

Another alternative policy suggestion is combining different bankruptcy thresholds with shorter periods of bankruptcy. For example:
• a minimum one-year discharge period from bankruptcy for debts of between $10,000 to $20,000
• a two-year discharge period for debts of between $20,000 to $50,000
• the current three-year period for debts over $50,000.

28 days is a reasonable length of time. As the consultation paper notes, the bankruptcy notice is the final step and would follow court judgements and numerous demands for payment. The reasonable debtor would have known about the action and doesn’t need any more than 28 days to respond.

We also believe a longer period would unfairly disrupt creditors.

No. We believe this to be a minor change.

In principle, we support removing bankrupts from the NPII after seven years following them being discharged from their bankruptcy.

To reduce the risk of bankrupts gaming such a reform, we recommend that the Regulator be given the power to extend the period the bankrupt’s information is kept on the NPII. This power should only be used in exceptional circumstances.

We don’t believe a transition period is necessary for this reform.

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We don’t believe a transition period is necessary for this reform.

In principle, we support reforms that would no longer consider entering into a debt agreement or having that debt agreement accepted by creditors, as an ‘act of bankruptcy’. As noted in the consultation paper, this would encourage the use of debt agreements and may boost the number of people in financial distress seeking advice from regulated advisers early.

If, however the debtor does not comply with the terms of debt agreement, there should be a process under the Act to effectively treat such non-compliance as an ‘act of bankruptcy’.

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