1-year bankruptcy

The bill to reduce the default period of bankruptcy from three years to one year was introduced into Federal Parliament in October 2017 and is expected to come into effect sometime in 2018.

The key features of the so-called 1-Year Bankruptcy Bill, which are explained below, especially note the impact of the commencement of 1-year bankruptcy on ongoing administrations.

1-Year Bankruptcy: Why the need for change?

The Australian government is of the view that our current personal insolvency laws put too much focus on stigmatising and penalising failure.

As part of the National Innovation and Science Agenda, reducing the term of bankruptcy to 1-year aims to promote entrepreneurship and innovation and to reduce the stigma associated with bankruptcy.

1-Year Bankruptcy Bill: Key changes

The main amendment to the Bankruptcy Act 1966 (the Act) concerns section 149.

The Act will now read:

‘the bankrupt is discharged at the end of the period of 1 year from the date on which the bankrupt filed his or her statement of affairs’.

This also reduces other time periods associated with bankruptcy to one year, including:

  • The obligation to disclose one’s status as a bankrupt when applying for credit;
  • The requirement to seek permission to travel overseas; and
  • The ability to enter into certain professions or positions (e.g. company director).

The income contribution obligations of discharged bankrupts will extend for at least two years following discharge (five to eight years if the bankruptcy is extended due to non-compliance).

For ongoing bankruptcies, the advent of the 1-year discharge will mean the following:

‘all bankruptcies on foot at the commencement date, except those subject to a section 149B objection, will be discharged if one year has expired since the bankrupt filed a statement of affairs with the Official Receiver.’ 

Ongoing bankruptcies not covered by the above:

‘will discharge on the day after the first anniversary of the filing of the statement of affairs with the Official Receiver’.

When will 1-Year Bankruptcy apply?

The 1-year discharge will commence six months after the bill receives royal assent.

According to the explanatory memorandum, this is designed to:

‘give trustees time to prepare any objections to discharge, and will enable relevant agencies time to consider whether a one-year licensing or professional restriction is appropriate for their purposes’.

Ongoing bankruptcies that have been extended for 5 or 8 years due to an objection to discharge (under section 149B of the Act) will remain unchanged.

The ability of a trustee or the official receiver to lodge an objection to discharge after the commencement of the 1-year default period for bankruptcy will also remain unchanged.

Read the Bill and the Explanatory Memorandum

Our view on the bill

Only a very small proportion of bankruptcies each year would specifically be a result of responsible entrepreneurship risk-taking. The large proportion relate to consumer debt.

Due to the combination of low interest rates, slow wages growth and house price rises, Australia’s debt-to-income ratio continues to climb.

However, with rising prices and low interest rates, Australians have been able to refinance and/or sell real property if they get into trouble with consumer debt.

It’s only a matter of time until housing process fall or interest rates rise and we will see higher levels of bankruptcies or debt agreements.

Debt agreements themselves have continued to rise, since they began in 1996. There were 13,597 new debt agreements in 2016–17. This represents an increase of 11.9% from 12,150 in 2015–16 and the highest number on record for the sixth consecutive financial year.

The new 1-year Bankruptcy Bill may create a shift in people’s preference for debt agreements to settle debts over a longer period and further increase these numbers.

Or will they opt for a 1-year Bankruptcy? We will have to wait and see how this plays out.