The Attorney-General’s Department has recently released a discussion paper with some more proposed changes to the Bankruptcy Act. Over the next few months we will discuss some of these proposed amendments. We start this month by looking at what will probably be one of the most controversial items – the length of the period of bankruptcy.
The proposed amendment is that the period of bankruptcy be a ‘maximum’ of 12 months for first time bankrupts – with the possibility of early discharge. It appears from the material in circulation that “A maximum of 12 months is considered more than adequate” to conduct the file – but we wonder whether the people who consider this have actually handled many estates.
This leads to two separate questions:
(1) whether the standard period of bankruptcy should be 12 months; and
(2) whether the early discharge provisions should be reintroduced.
It is proposed that second or subsequent bankruptcies would last for a longer period – but we do not know the length of that longer period. The reason for this is stated as to “recognise that the bankrupt could be expected to learn how to avoid [bankruptcy] a second time”. Becoming bankrupt would certainly be a learning experience for most people, and the vast majority of bankrupts never become bankrupt again. But maybe a time period – becoming bankrupt again within say 5 years of discharge from a previous bankruptcy – before being subject to an extended period will protect people that have just had bad luck with a future venture, as opposed to punishing ‘repeat offenders’ that use bankruptcy as a debt reduction tool.
The Attorney General’s comments are stated as: “A maximum of 12 months is considered more than adequate for the trustee to obtain all the information necessary to identify assets and debts, determine any possible liability to make income contributions and develop a plan to administer the estate. Where these investigations are concluded sooner, the bankrupt should be entitled to a discharge.”
Do the vast majority of bankrupts need to be bankrupt for 3 years? No. In the greater number of cases – and leaving aside income contributions – there is no benefit to creditors, the estate or the public interest in having most bankrupts remain bankrupt. Where necessary, the estate itself continues after the discharge of the bankrupt. In these cases, ending the bankruptcy early would be fine. Un-cooperative bankrupts would have objections lodged extending their bankruptcies – cooperative ones can be discharged and the provisions of section 152 (Discharged bankrupt to give assistance) would apply.
It is understood that income contributions (and many estates do not collect income contributions) would be paid over a longer period – we assume the original 3 years. This process will not be helped by the person remaining bankrupt.
Currently the standard period for a bankruptcy can be extended where the trustee files an objection to discharge. We have not seen any proposal to amend these provisions, but they would probably only be able to be activated during the 12 month period. But lets explore that topic at another time. Maybe section 152 will need to be ‘beefed up’ to properly and conveniently enforce cooperation after discharge.
The proposed amendments also consider the possibility of reintroducing the early discharge provisions. We do not know what has changed between the time that these provisions were removed from the Bankruptcy Act and now. For those not familiar with the provisions, under certain circumstances and at least six months after the commencement of the bankruptcy, the trustee could determine that a bankrupt should be discharged early and, by filing a document, make it so. These provisions were not considered appropriate before, I doubt that they should be appropriate again.
Bankruptcy should not be draconian, but it should not be easy.