Personal Insolvency Consultation – Minimal Asset Procedure

Overview

On 2 March 2023, the Attorney-General, the Hon Mark Dreyfus KC MP, convened a national Roundtable (Roundtable) with key stakeholders across all sectors of the personal insolvency system to better understand the pressure points and potential key areas for reform.

The Roundtable brought together 23 organisations from a wide range of sectors with an interest in personal insolvency, including credit, finance, accounting, legal sectors and consumer groups. The Roundtable provided an opportunity for practitioners and groups representing both creditor and debtor interests to engage directly with Government to provide an opportunity for dialogue between key stakeholders on personal insolvency priorities and emerging issues, and to increase effective collaboration between Government and key stakeholders in the development of personal insolvency law reform.

Following the Roundtable, we publicly consulted in September 2023 on 4 short-term priorities to meaningfully improve the Australian personal insolvency system. The government is working to progress amendments to the Bankruptcy Act 1966 (Cth) (Bankruptcy Act) based on responses to this.

We are now consulting on other issues raised through the Roundtable, to complement these proposed reforms.

Options for shorter discharge period

At the Roundtable, participants identified a shorter discharge from bankruptcy as a long-term reform priority. Participants considered whether the default discharge period for bankruptcy should remain at 3 years, or be reduced to 1 year.

Participants also raised an alternative solution for ‘no asset’ bankruptcies, modelled on New Zealand’s No Asset Procedure. Stakeholders briefly discussed how such a program would allow debtors with no way to repay their debts (i.e. low income and low asset debtors) to be discharged more quickly. Stakeholders identified that there is a cohort of debtors in Australia that enter into bankruptcy with minimal to no assets and where creditors do not generally receive a dividend from such bankrupt estates.

On 28 September 2022, the Parliamentary Joint Committee on Corporations and Financial Services began an inquiry into corporate insolvency in Australia. During this inquiry, reference was made to the New Zealand No Asset Procedure as a point of difference from the Australian personal insolvency system.

International models

As noted above, the New Zealand model has been raised in several forums as an option for Australia to consider. The New Zealand model provides an alternative personal insolvency option that allows a person with debts of between $1,000 NZD (New Zealand’s bankruptcy threshold) and $50,000 NZD and who holds no realisable assets to be cleared of their debts. The No Asset Procedure is less restrictive than bankruptcy and usually lasts for one year. A person is only able to enter into a No Asset Procedure once.

There are other international models which are intended to achieve similar purposes. These include the Debt Relief Order in England and Wales, the Minimal Asset Process in Scotland and the Debt Relief Notice in Ireland. We compare these processes in the discussion paper.

• Consultation Paper [PDF 408 KB]
• Consultation Paper [DOCX 152 KB]

Objectives of a Minimal Asset Procedure in an Australian context

Whilst bankruptcy is intended to provide a fresh start, it can have potentially life-long consequences. We are focusing on measures that seek to ensure that bankruptcy is regarded as an option of last resort, while ensuring that creditors’ and debtors’ interests are appropriately balanced in cases where there is no reasonable likelihood of a return to creditors. The consideration of a Minimal Asset Procedure in Australia seeks to further this rationale.

The Bankruptcy Act regulates Australia's personal insolvency system. It creates a framework to allow a debtor in severe financial stress to be discharged from unmanageable debts while allowing the realisation of a debtor's available assets for distribution to affected creditors. However, there exists a certain portion of bankruptcies which do not provide returns to creditors as there are no available assets for realisation.

We note that the current consumer environment consists of an increased cost of living with access to non-traditional forms of credit such as buy-now-pay-later options. This has led to an increasing number of debtors who are in financial distress. The increased cost of living and access to non-traditional credit (such as buy-now-pay-later options) has led to an increasing number of debtors who are in financial distress. Existing insolvency options may not be well suited for this cohort, meaning that aspects of bankruptcy are less effective at achieving a fresh start for debtors. Additionally, certain bankruptcies are uncommercial for private Registered Trustees and it is these bankruptcies that may be costly and lengthy for the Commonwealth (through the Official Trustee) to administer.

An objective of the Bankruptcy Act is that bankruptcy be regarded as an option of last resort and should allow a debtor a fresh start, whilst also attempting to balance the interests of creditors who are seeking a return on their credit. In some cases, however, a debtor is unable to repay any debts, and has no realisable assets in a bankruptcy which may otherwise be divisible amongst creditors. In such cases, bankruptcy is often a disproportionate option to the debtor’s circumstances. While other insolvency options may exist, these require an ability to repay some debts. 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.

A Minimal Asset Procedure may also have the effect of reducing the administrative burden on the Australian Financial Security Authority (AFSA), as eligible debtors are in the personal insolvency system for less time, as is appropriate for their circumstances.

Elements of the Minimal Asset Procedure

We have considered Australia’s existing personal insolvency system in addition to numerous overseas models. We consider the following to be potential elements of a Minimal Asset Procedure in Australia:

• there be a maximum debt threshold of $50,000 to enter the Minimal Asset Procedure;
• the Minimal Asset Procedure would last for 12 months, with a period of 4 years post-discharge to be listed on the National Personal Insolvency Index;
• a maximum threshold for income would be determined for eligibility for entry into a Minimal Asset Procedure;
• a maximum threshold of $10,000 in assets with exceptions for tools of trade and a vehicle to be eligible for entry into a Minimal Asset Procedure;
• a debtor may only enter into a Minimal Asset Procedure once during their lifetime, and
• a Minimal Asset Procedure should be less onerous than a bankruptcy.

Why we are consulting

We are consulting to understand the feasibility, benefits and possible consequences of a Minimal Asset Procedure in an Australian insolvency context.

We recognise that complex policy issues exist including:

• how the Minimal Asset Procedure would fit in the Australian personal insolvency system, and
• how to ensure the Minimal Asset Procedure is used appropriately.

We have consulted directly with AFSA and the Department of the Treasury and recognise that implementing a Minimal Asset Procedure in the current personal insolvency framework may lead to additional costs and administrative processes.

We are also seeking views as to where the Minimal Asset Procedure would fit within the Australian insolvency landscape. There are currently 4 personal insolvency options in Australia:

• temporary debt protection,
• debt agreements,
• personal insolvency agreements, and
• bankruptcy.

Who we want to hear from

While the consultation is open to all members of the public, we would particularly like to hear from:

• small business and consumer advocates,
• insolvency practitioners,
• creditor groups,
• debt collector bodies, and
• peak industry organisations.

The discussion paper includes questions to guide feedback. However, stakeholders are welcome to provide further information and suggestions relevant to each topic presented in this paper.

To make a submission, click on the ‘Make a submission’ link below. Please note that we will not publish your submission if you ask us not to, or if we consider (for any reason) that it should not be made public. We may redact parts of published submissions, as appropriate. Read our privacy policy to find out more.

If you have any questions about the consultation process, email bankruptcy@ag.gov.au.