Q: How does a 3 year contribution regime fit into a 1 year bankruptcy? A: badly

The legislation to shorten the default bankruptcy term to one year will maintain the three year term of the current income contribution regime. There is no particular policy reason why the two should align, and presumably those responsible believed that maintaining the three year period would maintain returns to creditors.

However, ending bankruptcy at the one year mark will remove a key point of leverage which assists trustees with the collection of information – and income contributions.  The absence of any replacement mechanism means that unless there is significant additional resourcing to AFSA’s enforcement function, returns to creditors probably will be affected.

Collection of information

Not all bankrupts will have a liability to pay income contributions – in fact, most will not,  but all bankrupts have an obligation to provide information so that the trustee can complete an income contribution liability assessment.

Currently if a bankrupt does not provide the information, the normal course is to file an objection to discharge which extends the term of bankruptcy; usually reversed when the information is received. The more draconian step – which trustees avoid if possible – is to ask the Australian Financial Security Authority (AFSA) to prosecute the debtor.

With the income contribution regime extending beyond bankruptcy, trustees will no longer have the ability to extend bankruptcy after the first twelve months. Because the legislation does not introduce any replacement mechanism, the only course of action available to trustees will be to report non-compliance with the Bankruptcy Act to AFSA for prosecution, in effect ‘criminalising’ non-compliance that was previously dealt with administratively.

How often will trustees need to request prosecution?

It seems likely that under the new model there will be greater non-compliance with the rules to provide information:

  • There will be some debtors who will not realise that they need to notify the trustee of a change of address after bankruptcy, who will simply be uncontactable.
  • There will be some debtors who won’t open or read correspondence from their trustee, because they are no longer bankrupt.
  • There will be those who – regardless of the the truth of the statement- will follow the advice of the unscrupulous non-mainstream advisers – to just ignore any correspondence because “the trustee can’t do anything about it.”

If referral to the AFSA is necessary for only 2% of the more than 50,000 current bankrupts, there will be at least 1,000 referrals to AFSA for action by the Department of Public Prosecution, each year.

Perhaps AFSA will have capacity to deal with each and every referral, but if not, returns to creditors will be adversely affected.

Possible Alternatives

If the objective is to allow individuals to act as a director, travel overseas, and incur credit within 12 months of being made bankrupt, then the simplest and most direct way to achieve this is to amend the relevant legislation to permit it – there is no need to shorten the term of bankruptcy.

Such a legislative change would clearly contribute to de-stigmatising bankruptcy.

However, if the length of bankruptcy must be shortened then we should look for a low-cost administrative process by which trustees can address the non-provision of information or non-payment of contributions.  This would avoid excessive additional workload for the AFSA, the DPP, and the Court System, and likewise avoid diminution of returns to creditors.

For example, trustees could be given the power to issue a ‘non-compliance notice.’  On receipt of such a notice, the debtor loses the capacity to act as a director, travel overseas, and incur credit (i.e. the current position), until they have remedied the specified non-compliance.

As discussed here, the draft legislation is subject to review by the Senate Standing Committees on Legal and Constitutional Affairs.  Submissions can be lodged via the process explained here, but must be received by 31 January 2018.

Commentary on the Bankruptcy Amendment (Debt Agreement Reform) Bill 2018, also referred to the Senate Standing Committees on Legal and Constitutional Affairs is here.

A copy of my submission is here.

4 thoughts on “Q: How does a 3 year contribution regime fit into a 1 year bankruptcy? A: badly

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out /  Change )

Facebook photo

You are commenting using your Facebook account. Log Out /  Change )

Connecting to %s