House of Representatives

Explanatory Memorandum

Circulated By Authority of the Attorney-General, the Honourable Robert Mcclelland MP

SCHEDULE 4 - OTHER AMENDMENTS

Increasing the minimum debt for a creditor's petition to $10,000

133. Currently under the Act a creditor can petition for bankruptcy where the debtor owes at least $2,000. Similarly, a creditor can request that the Official Receiver issue a bankruptcy notice where the debtor owes at least $2,000. The amount has been $2,000 since 1996 and was proposed as early as 1988 in the Harmer Report (the Australian Law Reform Commission's General Insolvency Inquiry). It is wrong to set in motion all the machinery of bankruptcy for the purpose of winding up a debtor's estate when, as is often the case, one creditor has a debt due to him of an amount not much more than $2,000. Raising the amount of the petitioning creditor's debt will lessen the opportunity to use bankruptcy procedures as a debt collection process. It is an established principle of the law of bankruptcy that, when a creditor sets in motion proceedings in bankruptcy, they do so for the benefits of all the debtor's creditors. Moreover, there has been a significant change in the value of money and levels of individual indebtedness since 1996 when the Bankruptcy Act was last amended in this respect.

134. During 2008-09, of 1953 sequestration orders made across Australia and matched by amounts in Bankruptcy Notices, 1551 were for an amount greater than $10,000; 217 were for an amount between $5,001 and $10,000; and 174 were for an amount between $2,000 and $,5000.

135. Item 1 will increase the threshold amount for issuing a bankruptcy notice from $2,000 to $10,000. Item 2 will increase the threshold amount for filing a creditor's petition from $2,000 to $10,000. Item 3 will make an equivalent amendment in relation to applications from creditors for an order that a deceased estate be administered as a bankrupt estate under Part XI of the Act.

136. Item 4 specifies that the higher threshold of $10,000 will apply to bankruptcy notices issued on or after commencement.

Increasing the stay period that follows the declaration of intent to file a debtor's petition

137. Under the Act a debtor can give the Official Receiver a declaration of intent to file a debtor's petition. Currently, once the debtor's declaration of intent to file is given, creditors cannot take action to recover any debts for a stay period of 7 days. Item 5 will increase the stay period from 7 days to 28 days by amending subsection 5(1).

138. A 7 day stay period does not give debtors enough time to assess their options. If a debtor is not fully informed about their options they may act precipitously. In any given 7 day period there will only be at most 5 working days (less when a public holiday falls during the seven day period). Given that most professional advisors that a debtor may wish to consult during the stay period are only open during normal working hours it would be very difficult for a debtor to obtain adequate advice during the 7 day stay period. If the 7 day stay period falls during the period leading up to the end of the financial year or during the Christmas period the debtor's difficulties in obtaining adequate advice during the stay period will be compounded. In addition, debtors typically owe money to a number of creditors and it can be difficult, at a time of financial stress, to achieve an outcome with each individual creditor within 7 days.

139. Item 6 will amend subsection 6A(1) so that section 6A applies to statements of affairs made under subsection 54A(2). Section 6A sets out the requirements for statements of affairs (with the exception of statements of affairs that are made under Part XI of the Act). It is expected that the statement of affairs required to accompany a declaration of intent to file a debtor's petition will be simpler than that required for bankruptcy and other forms of administration,

140. Items 7 and 8 will amend section 54A to the effect that a declaration of intent to file a debtor's petition under section 54A must be accompanied by a statement of the debtor's affairs and a copy of that statement. The requirement to file a statement of affairs will mitigate the risk of the debtor dissipating assets during the stay period.

141. Items 9 and 10 amend section 54C so that, if the Official Receiver accepts a declaration of intent to file debtor's petition, the Official Receiver must give written notice of the acceptance of the declaration to each of the creditors disclosed in the debtor's statement of affairs. Giving written notice of the acceptance of the declaration puts creditors on notice that they cannot seek to recover unsecured debts during the stay period and gives them official notice of the commencement and end dates for the stay period. It will also encourage creditors to be proactive in assisting the debtor to consider their options.

Increasing the debt income and assets thresholds for eligibility for debt agreements

142. A debt agreement is a voluntary agreement between a debtor and creditors proposed by the debtor. It is principally aimed at consumer debtors with lower levels of income, assets and debts. Consequently, there are statutory thresholds which determine eligibility.

143. Item 11 provides for the "threshold amount" for eligibility for debt agreements to be increased by amending subsection 185C(5). Currently the "threshold amount" in relation to a particular point in time, is defined as being 7 times the amount that, at that time, is specified in column 3, item 2, Table B, point 1064-B1, Pension Rate Calculator A, in the Social Security Act 1991. Item 11 increases the multiplier from 7 to 8.4. This translates into a 20 % increase.

144. The present thresholds are: after tax income of less than $62,735.40; unsecured debts, and assets, of less than $86,647.20. These thresholds were last revised in 2002 with the aim of making debt agreements more widely available. They were also considered in a review of debt agreements conducted prior to amendments which commenced on 1 July 2007. During that review, it was decided to retain the thresholds at their current levels until the next review of debt agreements scheduled for 2010. This was to allow time to evaluate the effectiveness of the 2007 amendments which were aimed at restoring creditor confidence in the system and addressing the unacceptably high failure rate. However, it is considered that a modest increase in the thresholds in advance of the 2010 review is consistent with current policy and merely recognizes the increases in debt, wealth and available income since the thresholds were last revised. Since the 2007 amendments, the termination rate has fallen to around 4% of debt agreements made since 1 July 2007. This compares with a termination rate of 35-40% under the previous rules. In addition, the rate of acceptance by creditors of debt agreement proposals has increased from less than 70% to over 85%. This demonstrates greater confidence by creditors in the system.

Presentation of false section 54A declaration to be an offence

145. Section 267 makes it an offence for a debtor or bankrupt to sign a declaration made under certain sections of the Act which the debtor or bankrupt knows to be false. Item 12 amends paragraph 267(1)(a) to the effect that a debtor or bankrupt who signs a declaration presented under section 54A that they know to be false will be committing an offence. This will ensure that a section 54A declaration is treated in the same way as other similar declarations.

Application of Schedule 3 amendments

146. Item 13 sets out how the amendments made under Schedule 3 will be applied.