Moralism rules in debt and bankruptcy

The Australian government yesterday released proposed reforms to personal bankruptcy law and showed a decision to back away from some of the tougher talk contained in a discussion paper released in May.

The minimum debt for which a creditor can petition for bankruptcy is being raised from $2000 to $10,000. The two thousand dollar threshold, unchanged since 1996, had become increasingly indefensible.

Data published yesterday by the Attorney General's Department shows that of 1953 sequestration orders made across Australia in 2008/09 and matched by amounts in Bankruptcy Notices, 1551 were for an amount greater than $10,000; 217 were for an amount between $5001 and $10,000; and 174 were for an amount between $2000 and $5000.

Debtors will now have 28 days respite from creditor action, instead of seven, to think about their options after filing a declaration of intent. As the Attorney-General, Robert McClelland commented, seven days usually means five or even less working days and has also become indefensible.

Trustees will now be able to claim $5000 for themselves from the estate of the bankrupt without creditor approval.

Income and asset thresholds for debt agreements are being raised by twenty per cent. Creditors get a lot more money back from debt agreements, on average about 76 cents in the dollar, compared to bankruptcies where the average return is less than two cents.

Where McClelland has really changed his tune is on the length of time a bankrupt serves before s/he can get their life back.

In May McClelland was adamant that the penalty for going bankrupt should be cut from three years back to a maximum of 12 months, in recognition that most bankrupts are not law-breaking, shonky business people, but hapless low income consumers who have lost their job or their health.

That idea has now disappeared, reportedly after heavy lobbying from banks.

Back in May McClelland criticised the "punishment" element of bankruptcy law and said a first-time bankrupt "who co-operates fully and promptly" should be able to be discharged from being declared a bankrupt almost as soon as the paperwork is completed and all creditors have been identified.

Yesterday's release from McClelland again conceded that "most bankrupts have not engaged in criminal or fraudulent activity relating to their debts nor have they taken steps to conceal or dispose of assets prior to bankruptcy."

Further, McClelland wrote that "the majority of bankruptcies relate to consumer debts and involve people with relatively few assets and little income."

Now, less than three months later, all that seems to have been forgotten.

The closing date for submissions on the draft legislation is 14th September.