Insolvency Reform Edition 15 | 1 year bankruptcies. Will we regret this?

The Bankruptcy AmendmentThis article of Insolvency Reform discusses the Bankruptcy Amendment (Enterprise Incentives) Bill 2017.


The Bankruptcy Amendment (Enterprise Incentives) Bill 2017 (“the Bill”) was referred by the Senate on 30 November 2017 to the Legal and Constitutional Affairs Legislation Committee for inquiry and report. The Committee is due to report by 19 March 2018. Submissions to the inquiry closed on 31 January 2018.

The Bill will reduce the period a bankrupt individual must wait for automatic discharge from bankruptcy from 3 years to 1 year after the filing of a statement of affairs by the bankrupt.

A bankrupt will remain subject to the income contribution regime until the later of 3 years from the day they became bankrupt or when they are discharged.

This amendment may result in higher income contributions being paid to the bankrupt estate by a discharged bankrupt than may have been paid if the period of bankruptcy remained 3 years. After the 1 year period of bankruptcy a discharged may return to business activities, or gainful employment without the social stigma and legal disabilities of bankruptcy.

But will a trustee be able to convince the former bankrupt to comply with their continuing obligations without the stick of objecting to a bankrupt's discharge?

Bankruptcy will remain subject to the income contribution regime.The 1 year period of bankruptcy has been the subject of some criticism. It is argued by some that 1 year is not long enough. Some critics of the 1 year period of bankruptcy argue on the basis of increased risk of moral hazard (ie. a lack of incentive to guard against risk where one is protected from its consequences).

A potential downside of the reduced period of bankruptcy are windfall gains the bankrupt may enjoy over the extra 2 years such as a lottery win or a bequest from a deceased estate. However the likelihood of an estate benefiting from such a windfall even now is remote at best.

But how long is enough? Was three years long enough? Bankruptcy is not intended to be a punitive process. Bankruptcy is a rehabilitative process.

The bankruptcy process incorporates a bankruptcy bargain. The bankruptcy bargain provides a bankrupt with a fresh start free of their debts. In return for the fresh start the bankrupt surrenders their divisible property to the trustee of their estate for realisation and distribution among their creditors.

Rogue bankrupts who fail to comply with their obligations may have their discharge objected to by their trustee for either 3 or 5 years. Rogue bankrupts who commit offences may still be prosecuted. A bankrupt can still remain bankrupt forever, if they fail to complete and lodge a statement of affairs.

Non business related bankruptcies account for between 80% and 90% of bankruptcies in Australia. Creditors’ returns from these bankruptcies are unlikely to decline due to the reduction in the period of bankruptcy to 1 year. Will we regret this? Probably not.

If you have any questions in relation to this article, please contact your local RSM adviser or David Kerr.

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