The involuntary bankruptcy threshold will lift from $10,000 to $20,000, Attorney-General Mark Dreyfus says, giving debtors more breathing room before their creditors can launch court action.
On Monday, Attorney-General Dreyfus said the federal government will introduce a suite of reforms to the bankruptcy system, bringing it up to speed with the contemporary economic landscape.
In a statement, Dreyfus said the amendments will “ensure a fairer outcome for debtors in the personal insolvency system,” and “reduce the stigma currently associated with entering into bankruptcy”.
Chief among the reforms is a permanent lift to the bankruptcy threshold, which has rested at $10,000 since January 1, 2021.
The $20,000 limit is not entirely new, as the threshold was temporarily lifted to $20,000 in the depths of COVID-19 economic havoc.
However, the updated threshold will be indexed annually under the new system.
Under the reforms, debtors will also be granted 28 days to respond to a bankruptcy notice, up from 21 days.
The length of time a discharged bankruptcy is listed on the public National Personal Insolvency Index will drop to seven years, instead of a permanent listing in today’s system.
Additionally, proposing or accepting a debt agreement will no longer count, in and of itself, as an act of bankruptcy under subsection 40(1) of the Bankruptcy Act.
While the reforms concern personal bankruptcy and not the corporate insolvency system, they are likely to significantly overlap with the small business sector.
The Australian Financial Security Authority, which oversees the application of bankruptcy laws, says 25.4% of personal insolvencies were business-related in the March quarter of 2024.
Small business finances can intersect with the personal bankruptcy system in several ways.
Company directors may be held personally liable for Australian Taxation Office debts when they are hit with a Director Penalty Notice.
Entrepreneurs who use personal guarantees to secure business finance may also face the prospect of bankruptcy if a creditor demands repayment.
Directors who breach their duties to their company may open themselves to personal financial liability.
Small business stakeholders have mixed views on the new $20,000 limit.
During consultations led by the Attorney-General’s Department late last year, the Australian Small Business and Family Enterprise Ombudsman (ASBFEO) welcomed the proposed threshold lift.
The $20,000 limit “better aligns” with modern cost-of-living pressures, the ASBFEO said, while praising the work of financial counsellors to help debtors get back on track without drastic legal action.
The Australian Restructuring Insolvency and Turnaround Association, the peak body for the restructuring and insolvency sector, worried the change could stem the flow of finance to small-time borrowers.
In its submission, it said some credit providers may reconsider their lending practices under the $20,000 limit, as they will have “less leverage in seeking payment of debts between $10,000 and $20,000”.
CPA Australia business and investment policy lead Gavan Ord shared a similar perspective, saying the increased threshold could lower lending confidence, “especially for those small business selling on credit”.
While only a small percentage of involuntary bankruptcies relate to debts of $10,000, the mere act of petitioning for bankruptcy can speed up repayments to small businesses, Ord continued.
“It should also be noted that reducing the rights of businesses, particularly smaller business to recover debts may transfer financial stress onto them,” he said.
“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.”
On top of the confirmed reforms to the bankruptcy scheme, the Attorney-General’s Department opened a consultation on a new, additional system relating to outstanding smaller debts with no realistic chance of repayment.
This so-called Minimal Asset Procedure could address circumstances where a debtor is “unable to repay any debts, and has no realisable assets in a bankruptcy which may otherwise be divisible amongst creditors,” according to the consultation paper.
“In such cases, bankruptcy is often a disproportionate option to the debtor’s circumstances.”
By contrast, a Minimal Asset Procedure “would allow a debtor to achieve a fresh start, while also having minimal impact on creditors who would likely not have received any return had a debtor become bankrupt”.
The Attorney-General’s Department suggests a maximum debt threshold of $50,000, and a four-year post-discharge listing on the National Personal Insolvency Index as potential elements of the Minimal Asset Procedure.
It has invited small business representatives to comment on the proposal, with submissions due by July 29, 2024.
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Senior Business Journalist
Focused on the small business sector, David’s work covers the political, regulatory, and economic issues facing Australian entrepreneurs. Prior to joining SmartCompany, he was a reporter for Business Insider Australia. You can follow him on LinkedIn.
