Personal Insolvency Consultation

The temptation to increase the threshold for creditors (again) to a double level of $20,000 should be resisted as it further enfeebles them in recovery of debts. If the constant less of value in money is the concern, then a more modest CPI increase annually could be considered.

I have been a commercial lawyer for over 30 years, during which time I have been frequently acting for creditors seeking to recover debts from individuals, either as personal debtors directly or as guarantor debtors for related corporate debts. I recall the debate surrounding the increase in the threshold requirement for a creditor’s petition in bankruptcy from $2,000 to $10,000 in 2009. At the time, I wrote an article entitled “Bankruptcy – Raising the Threshold for Creditors” which was published in Volume 21 of the Australian Insolvency Journal. My article was referred to by the Honorable Michael Kirby, former Justice of the High Court of Australia, in his 2010 paper “Bankruptcy and Insolvency: Change, Policy and the Vital Role of Integrity and Probity” delivered at the IPAA conference in Adelaide. Many of the same arguments and rationales behind the current proposed reforms to the Bankruptcy Act are identical to those arguments and rationales raised in 2009.
Therefore, it is pertinent to refer to the comments of the Honorable Michael Kirby from 2010 as follows:-
“In cases to which they apply, there is little doubt that debt agreements return, on average, a much better dividend for creditors than bankruptcy: about a 76% return which is substantially greater than the average return in a bankruptcy of only approximately 1.6%. The circumstances in which debt agreements should be encouraged, in place of resort to bankruptcy, is still a matter of lively debate in Australia. That debate broke out in response to the Bankruptcy Legislation Amendment Bill 2009 (Cth). That bill proposes an increase in the threshold requirement for a creditor’s petition in bankruptcy in Australia from $2,000 to $10,000.
Supporting this proposal, the Federal Attorney General pointed out that money had lost value since the $2,000 threshold had been set in 1996; that only 20% of sequestration orders in the last finance year were for debts between $20,000 and $10,000; that bankruptcy orders leave a permanent record which can blight the lives of young debtors, impeding them in securing essential assets such as houses and cars; and that the returns on bankruptcies are so low as to warrant encouraging the use of procedures involving agreement rather than invoking coercive proceedings in bankruptcy. The Attorney General expressed his concern that ‘too many creditors are using bankruptcy as a tool in debt collection as opposed to a last resort’ (Robert McClelland, Attorney General, reported Australian Financial Review 27 August 2009).
The comments on this relevantly straight forward legislative proposal reflect many of the policy debates that were addressed to the Australian Law Reform Commission in 1976 in his article on the suggested reforms, Mark Worsnop put it this way:
‘The proposed increase to the bankruptcy threshold for creditors, only, to $10,000 is unlikely to please either camp in the ongoing philosophical debate between debtors and creditors. Debtors argue that bankruptcy should not be seen as a debt collection process, but they fail to take into account that often the threat of bankruptcy remains the only practicable means for a creditor to enforce a judgment debt…… The increased threshold may prove a saving to some creditors chasing genuinely impecunious “small” debtors, but reduces the most effective means of recovery against the rest, while increasing the total debt that individuals debtors can carry. Until alternative enforcement processes are made more effective, disarming judgment creditors should be done with great care, to avoid Court judgments being reduced to nothing more than pieces of paper’.
As I read these remarks, they take me back to the disputes we had in 1976 in formulating the ALRC’s response to issues of small consumer debt recovery. The Commission recorded, even in those days, ‘creditors rarely bring petitions against non-business debtors, partly because of the costs involved, partly because credit providers believe it may provide bad publicity and detrimentally effect future business. The insolvency procedures of the Bankruptcy Act are available only to business debtors. For reasons which are substantially explained, they are rarely used by non-business debtors’”.
The Honorable Michael Kirby in 2010, later made the following remarks:
“In 1976, as now, the threat of bankruptcy and insolvency (which still has a reputational sting for individual debtors and for company directors), will sometimes produce a speedy resolution that avoids resort to the formal procedure set in train once bankruptcy or insolvency applies. We cannot banish this reality from the dialogue about bankruptcy and insolvency. Debtors must, it is true, be protected from the misuse of statutory procedures as an aid to what is effectively no more than simple debt recovery. By the same token, creditors need to be protected from debtor fraud, incompetency or indifference. Securing the right mixture of statutory provisions will always be controversial. As in most such controversies, there are arguments on both sides. This was understood by the ALRC in 1976. Doubtless it is appreciated by the Federal Attorney General in 2010.”
The threat of bankruptcy against individual debtors remains a powerful tool, perhaps the only one of any significance that remains in a creditor’s arsenal in Australia. Anecdotally, warrants of seizure and sale and attachment of earnings/garnishee order applications, are often next to useless in enforcing debts against a debtor familiar with the debt recovery system. There are many advisors to debtors in the marketplace today. Not all creditors are institutional behemoths, such that for many creditors the cost of first having to obtain a judgment against a recalcitrant debtor before embarking on the expense of bankruptcy proceedings, acts as a sufficient deterrent to such actions being taken lightly. Many debtors know and understand this as well. Even now, it is not unknown for debtors to make a partial payment to a creditor, simply to return the balance of a debt owing under the current $10,000 threshold for bankruptcy.
Creditors will often sit on a judgment they have obtained against a debtor without issuing bankruptcy proceedings, simply because of the high costs involved in obtaining of bankruptcy order. In particular, the stages after a bankruptcy notice has lapse are highly expensive and can readily cost a creditor in the range of $5,000 to $10,000 to effect. It is not unusual for creditors to take the step of serving a bankruptcy notice but then when it lapses, choosing not to proceed to the creditor’s petition stage, simply due to the costs involved and the high uncertainty of any recovery. However, while the threat remains that a creditor may, in principle if nothing else, choose to pursue a recalcitrant debtor all the way through to a sequestration order in bankruptcy will, in the words of the Honorable Michael Kirby cited above, “sometime produce a speedy resolution that avoids resort to the formal procedures set in train once bankruptcy or insolvency applies.”

The proposed increase for a debtor to respond to a bankruptcy notice from 21 to 28 days sends a signal to debtors that the Law is becoming softer on them but without making what appears to be any meaningful change – that is, a debtor who cannot address a bankruptcy notice within 21 days is equally unlikely to be able to address it within 28 days. Before a creditor reaches the bankruptcy notice stage, it will usually have been a long and protracted series of steps some of which, such as obtaining a judgment in court, cannot be avoided.

No. The proposed increase for a debtor to respond to a bankruptcy notice from 21 to 28 days sends a signal to debtors that the Law is becoming softer on them but without making what appears to be any meaningful change – that is, a debtor who cannot address a bankruptcy notice within 21 days is equally unlikely to be able to address it within 28 days. Before a creditor reaches the bankruptcy notice stage, it will usually have been a long and protracted series of steps some of which, such as obtaining a judgment in court, cannot be avoided.

No, it appears more to be a social than economic argument that is being propounded in support of the proposed reform.

Reduce the threat of consequences in becoming bankrupt.

Reducing the now permanent record on the National Personal Insolvency Index back to seven (7) years, again further weakens the situation for creditors. As stakeholders have noted, credit reporting standards (on which lenders usually rely) already remove such records within 6 years already which frees the ability of former debtors to obtain credit again in future.

Once exceptions are selected, then where do you draw the line in future? Exceptions are inherently a non-inclusive approach.

Perhaps a long enough period to allow for a change of political party in government in the usual cycle of politics.

Reducing the now permanent record on the National Personal Insolvency Index back to seven (7) years, again further weakens the situation for creditors. As stakeholders have noted, credit reporting standards (on which lenders usually rely) already remove such records within 6 years already which frees the ability of former debtors to obtain credit again in future.

It appears to be an argument propounded on principle rather than economic in flavour.

There will always be winners and losers in any changes to the laws.

It should exempt 'repeat offenders', or at least within a pre-set period of time since the last debt agreement.

It should exempt 'repeat offenders', or at least within a pre-set period of time since the last debt agreement.

Two years, to enable further consideration of the impact before it becomes law.

It does seem sensible for debt agreements entered into to avoid bankruptcy not to be themselves characterised as an “act of bankruptcy" , especially as a once-off opportunity for debtors.