House of Representatives

Bankruptcy Legislation Amendment Bill 2009

Second Reading Speech

Mr McClelland (Attorney-General)

I move:

That this bill be now read a second time.

The principal purpose of the amendments to be made by the Bankruptcy Legislation Amendment Bill 2009 is to modernise the national personal insolvency scheme and to make it more efficient.

These are tough economic times which are impacting on many Australians. In the last year, there was an 11 per cent increase in bankruptcies. The 2008-09 financial year produced the highest ever level of personal insolvency-a total of 36,479 administrations. The vast majority of these are non-business bankruptcies principally involving consumer debts.

Quite often, people become bankrupt through no fault of their own as unforeseen circumstances hit them. The government is also concerned that too many creditors are still using bankruptcy as a tool in debt collection as opposed to a last resort. However, the government is also conscious of the needs of business, particularly in these times, to be paid and also to be paid on time.

In these circumstances, it is more important than ever that our system for dealing with bankruptcy is both fair to debtors and also to creditors. It is also important to the broader Australian economy that we have strong but fair bankruptcy laws.

Our bankruptcy system must enable small and large business to efficiently and cost-effectively recover their debts. However, it must also ensure that individuals are not prevented from making a meaningful contribution to the economy because of the stigma of bankruptcy or from being burdened by excessive debt and fees arising from the bankruptcy process itself.

In short, our bankruptcy laws must strike a balance between the need for fairness and the need to ensure a strong economy.

This bill strikes that balance.

The provisions contained in this bill have been the subject of extensive consultation. Following discussions with industry stakeholders earlier this year, I released an exposure draft of the bill on 25 August 2009 and invited interested parties to make submissions.

I received submissions from a wide variety of stakeholders including creditors, financial counsellors and members of the public. The provisions in the bill relating to trustee remuneration and offences were also the subject of extensive consultation in 2007 and 2008.

I turn now to a few specific aspects of the bill.

Bankruptcy is a complex and costly process. It is costly to the parties affected and to the community. It is therefore inappropriate to use it to recover debts of not more than $2,000.

Accordingly the bill provides that the minimum amount upon which a creditor can petition for a debtor's bankruptcy will increase to $10,000. The current minimum amount of $2,000 for a creditor's position was originally set in 1996. The increase in the minimum amount to $10,000 is not merely intended to reflect the increase in the value of money since 1996. It is also intended to reflect the significant increase in the overall levels of personal debt since 1996.

Last year only 20 per cent of bankruptcies related to debts of between $2,000 and $10,000. As I have stated, the government is conscious of the importance to business, especially small business, of prompt payment of bills. However, bankruptcy should be the last resort for creditors and debtors alike.

Creditors have other options available to collect these debts and should have systems in place to manage the debts owed to them. Options include negotiated payment arrangements, civil debt recovery, garnisheeing income and seizing assets. These are more appropriate than bankruptcy for recovering a small debt.

The bill also provides for an increase in the stay period for a declaration of intent to file for bankruptcy from seven to 28 days. When a debtor files a declaration of intent to file for bankruptcy, creditors are barred from taking any action to collect any debts during the stay period.

Increasing the stay period from seven days to 28 days will give debtors a more realistic opportunity to properly assess their options. A debtor can also use the stay period to consult with a financial counsellor, a legal practitioner or to negotiate with his or her creditors.

The amendments will also require the Official Receiver to notify creditors where a debtor files a declaration. This may be the first time some creditors become aware of the extent of the debtor's financial problems. This amendment will allow creditors to be proactive in assisting the debtor to find an alternative to bankruptcy.

When a debtor files a declaration of intent to file they will also be required to lodge a statement of affairs. The requirement to lodge a statement of affairs will protect the interests of creditors, in particular. It will prevent the debtor from dissipating funds and assets, potentially to pay creditors.

The bill provides for a 20 per cent increase in the income threshold for debt agreements. A debt agreement is a voluntary agreement between a debtor and creditors proposed by the debtor.

With increases in wages and availability of credit in recent years, it is appropriate that the income thresholds for debt agreements be moderately increased. This increase will make debt agreements more widely available.

In recent years debt agreements have become an increasingly popular alternative to bankruptcy. Not only can they be good for debtors; they can also be good for creditors. They provide far superior returns to creditors when compared with bankruptcy. Last year, debt agreements provided an average return to creditors of around 60c in the dollar, compared with less than 2c in the dollar from bankruptcy.

It is in the interests of both a bankrupt and their creditors that an estate is not unnecessarily diminished by the fees incurred in its administration. Trustee remuneration should be reasonable and reflect the value of the work. As a result, this bill provides a more streamlined and fairer process for fixing and reviewing trustee remuneration. It also ensures that creditors have proper oversight of a trustee's administration of a bankrupt estate.

In particular, the bill:

provides a minimum entitlement to remuneration which recognises the basic work that every trustee must do in administering an estate;
reinforces the basic principles that remuneration above that minimum entitlement must be approved by creditors and that all remuneration must be paid from the estate;
provides trustees with certainty concerning approval of their remuneration; and
provides an effective and accessible mechanism for reviewing remuneration and costs incurred by the trustee.

Importantly, the bill also provides trustees with stronger powers to obtain a statement of affairs from a bankrupt who fails to file this as required. The statement of affairs is the most important information required by a trustee to commence administering the bankrupt's estate. Failure to comply with the requirement to file a statement of affairs significantly frustrates the trustee's ability to administer the estate in a timely way. Failure to provide a statement of affairs often results in a trustee expending additional time and expenses to identify a debtor's assets, income and liability. This in turn can diminish a bankrupt's estate and returns to creditors.

Finally, the bill also includes provisions related to offences. These amendments will help ensure that any criminal or improper activity by bankrupts is dealt with appropriately.

These amendments will also assist in highlighting the different treatment for bankrupts who engage in criminal activity compared with those who are simply unfortunate.

Importantly, these offences will assist to preserve the integrity of the National Personal Insolvency Index. This index is the public record of bankruptcy and personal insolvency events, and is an important tool for business and lenders.

In summary, the government is committed to ensuring our bankruptcy laws are able to deal with personal insolvency issues quickly and efficiently so that people can get back on their feet as soon as possible. However, the government also concerned that there are proper protections for creditors and that bankruptcy laws are not misused.

I commend the bill to the House.

Debate (on motion by Mr Forrest) adjourned.

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