This speech was delivered by the honourable Robert McClelland MP, Attorney General on March 3rd 2010 at D&B's Consumer Credit Conference.
Thank you for the opportunity to speak today. As you would be aware, the Government has introduced legislation to reform and modernise Australia's personal insolvency system.
Today I would like to talk about the proposed changes and how they fit into general trends we are observing, trends in the economy, in bankruptcy statistics, and in legislation both in Australia and around the world.
The Australian economy has weathered the global financial crisis better than most other developed nations.
The Organisation for Economic Co-operation and Development (OECD) estimates that the Australian economy grew by one per cent in 2009, compared with an OECD average of minus 3.5 per cent.
However, even though Australia has avoided the worst of the crisis, it is important to acknowledge that many Australians are still doing it tough.
In 2008-09 there was an 11 per cent increase in personal insolvencies with over 36,000 administrations. This represents the highest ever level of personal bankruptcies in Australia and continued what has been a consistent long term upward trend in personal insolvency activity.
One aspect of the recent figures that is worth highlighting is the impact of debt agreements on the rise in activity. In 2008-09, personal bankruptcies were up six per cent year-on-year, while debt agreements increased by 29 per cent over the same period.
While I certainly would not wish to welcome the increase in the level of personal insolvency activity, it is heartening that much of the increase is being driven by a greater uptake of debt agreements.
Debt agreements not only allow debtors to avoid the stigma of bankruptcy (and all that comes with it); they also provide far superior returns to creditors than bankruptcy. They facilitate the negotiation of a plan for repayments between creditors and debtors, rather than simply pulling down the shutter on the prospect of future recovery - so often bankruptcy has that effect.
This increasing trend in personal insolvency activity has been experienced around the world.
Last year England and Wales recorded the highest level of personal insolvency since records began in 1960. In the United States of America, bankruptcy filings in January were up 21 per cent year-on-year. In Canada, the total number of insolvencies was up over 31 per cent during the twelve months to November 2009. Finally, in New Zealand, personal insolvency numbers were up by 48 per cent in 2008-09 compared to 2007-08.
Given this trend, coupled with the spectre of recession, it is not surprising that many countries are embarking on bankruptcy reform.
In 2009 Canada implemented reforms to its personal bankruptcy system, increasing the threshold for consumer proposals - which are roughly equivalent to Australia's debt agreements - from $75,000 to $250,000. Canada also significantly expanded the income contribution regime for bankrupts.
In the United States, President Obama has proposed that bankruptcy judges be allowed to modify or "cram down" mortgages in some circumstances.
As you would be aware, here in Australia, the Government is also seeking to reform and modernise Australia's personal insolvency system for the first time in over a decade.
Bankruptcy Reform
The Bankruptcy Legislation Amendment Bill 2009 passed through the House of Representatives last year and I expect it will be debated in the Senate in the coming fortnight.
Broadly speaking, the Bill introduces a number of reforms, including:
- increasing the minimum amount for which a creditor can petition for bankruptcy from $2,000 to $10,000;
- increasing the stay period from when a declaration of intent to file a debtor's petition is filed to when a creditor may commence action to recover debts from seven to 28 days;
- increasing the income, asset and debt thresholds to allow more people in financial distress to enter into voluntary debt agreements;
- introducing a more efficient and transparent process for fixing and reviewing trustee remuneration;
- strengthening the penalties for some offences, particularly those involving fraud; and
- enhancing powers for the Inspector-General in Bankruptcy to investigate possible offences.
There are two sides of the coin to these reforms.
On one side, these reforms seek to give those in financial distress a more realistic opportunity to consider their options, reorganise their affairs and where possible, avoid bankruptcy. On the other side of the coin, there will be a greater emphasis on requiring good faith disclosure with substantial penalties to enforce that obligation.
These reforms recognise the fact that the majority of bankruptcies now relate to consumer debts and involve people with relatively few assets and little income, rather than unscrupulous debtors trying to avoid paying their debts.
Equally, it is recognised that insolvency laws can be abused and hence the stronger penalties for lack of good faith.
Today, I would like to highlight aspects of the Bill that have been the focus of considerable debate - namely, changes to the minimum amount for creditor petitions, the increase in the stay period for declarations of intent to file and the increase in the thresholds for debt agreements.
Threshold for Creditor Petitions
The proposal to increase the threshold for creditor petitions from $2,000 to $10,000 has drawn significant attention from stakeholders and consumers alike.
Increasing the threshold - which has not changed since 1996 - will ensure that debtors are not bankrupted over relatively small amounts.
It simply doesn't make sense in today's environment to set in train the complex and costly process of bankruptcy to recover small debts. If we are frank, petition for bankruptcy is only really effective if it intimidates a debtor to pay his or her debts. Otherwise all the logic points to the benefits of debt agreements which recover, on average, 70 cents in the dollar compared to 2 cents for bankruptcy. But the public is entitled to question the extent to which limited Court resources are used as a debt collection tool.
In short, bankruptcy must be perceived as a last resort - for both debtors and creditors - rather than as simply another instrument of debt collection. The reforms are intended to stop the unscrupulous and predatory use of the Bankruptcy Act.
For example, in a submission on an Exposure Draft of the Bill, the Financial and Consumer Rights Centre explained how the cost of bankruptcy was sometimes completely disproportionate to the original debt.
In one case, a woman on a carer's pension of around $670 a fortnight was sent bankrupt over a 2001 internet services bill that was originally less than $1,000. Yet the woman ended up paying a further $20,000 in trustee fees.
The Centre also described how people often end up losing their homes over relatively small debts, commenting that "Forced bankruptcy in order to liquidate a person's home over a $5,000 debt is a disproportionate response".
The Financial and Consumer Rights Centre has noted that, in most cases, consumer debts are only one third of a Trustee's claims for remuneration and expenses.
I acknowledge that some have argued that the Government's reforms will make it more difficult for small business to collect their debts.
In that respect it is of note that the Council of Small Business Organisations of Australia (COSBOA) has recently expressed their support for the Bill.
According to COSBOA:
"The priority for small business is the ability to efficiently and effectively collect money that is legitimately owed. To that extent, proposed reforms increasing thresholds and providing a greater opportunity to negotiate the repayment of debts, is likely to result in better outcomes for Australian small business."
"An increase in the bankruptcy threshold from $2000 to $10,000 could cause some nervousness among small business owners with small debts to recover - but the best chance of repayment results if bankruptcy is not declared."
COSBOA goes on to state that the Government's proposed Bill will "ultimately improve the position for many small businesses that experience difficulties recovering small consumer debts."
I would also note recent comments by Dun & Bradstreet underlining the fact that most small business debts were over $10,000 in any case.
This is supported by statistics from the Insolvency and Trustee Service Australia (ITSA) which show that in 2008-09 there were only 393 sequestration orders for a debt amount less than $10,000.
Given there are nearly two million small businesses in Australia, it is likely that only a very small proportion of small businesses would file a creditor's petition for an amount of less than $10,000 in any given year.
For these reasons, I do not believe the proposed increase in the minimum amount will have a large or disproportionate impact on small businesses.
Business will, in any event, continue to have a number of options available to collect their debts, including negotiated payment arrangements, civil debt recovery, and garnisheeing income, to name a few.
It is necessarily the case that, while small businesses obviously must collect their debts diligently and expeditiously, it is also the case that many successful businesses commenced as small businesses and experienced some tough times along the way.
As in all matters of public policy, there will be different interests and different views. While the Government will pay due respect to the Senate Committee findings, I am satisfied we have the balance right.
Stay Period for Declaration of Intent to File
Another issue that has been the subject of discussion is the Government's intention to increase the stay period for a declaration of intent to file a debtor's petition from seven to 28 days.
When a debtor files a declaration of intent, creditors are barred from taking any action to collect any debts during the stay period.
Accordingly, increasing the stay period will give debtors a more realistic opportunity to properly assess their options, negotiate with their creditors, organise repayment plans and where possible, avoid bankruptcy.
It is important to note that the proposed increase in the stay period would be underpinned by the obligations on the reverse side of the coin that I have spoken about - that is, the requirement for the debtor to lodge a statement of affairs in order to protect the interests of creditors.
The proposed increase in the stay period will encourage both debtors and creditors to be proactive in finding alternatives to bankruptcy which has historically resulted in a significantly reduced returns to creditors - the figures I have mentioned; 70 cents in the dollar if they enter into debt agreements, as opposed to just two cents in the dollar if bankruptcy takes place.
Despite this, it is interesting to note research conducted by ITSA in 2008 into the experience of those who entered into debt agreements, in which 68 per cent of debtors surveyed reported that they had asked their creditors for a repayment plan, but only 46 per cent of debtors surveyed reported that the creditors had offered to assist.
An extended stay period will give debtors a realistic opportunity to approach creditors and other financial advisers in an effort to address and repay their debts - something which would be in the interests of creditors and debtors alike.
Thresholds for Debt Agreements
Finally, I'd like to turn to the proposed 20 per cent increase in the income, assets and debt thresholds. This increase aims to make debt agreements more widely available.
In recent years debt agreements have become an increasingly popular alternative to bankruptcy. They provide a viable alternative to bankruptcy for many debtors and can provide far superior returns to creditors when compared with bankruptcy.
The proposed change to the thresholds represents a modest increase and recognises the reality that overall levels of debt and disposable income have increased beyond the applicable CPI increases in recent years.
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.
The Government is, however, also concerned that there are proper protections in place for creditors, and that bankruptcy laws are not misused.
To this end the Government will continue to look for ways to improve Australia's personal insolvency system.
In particular, the Government is committed to undertaking a review later in the year of the effectiveness of changes to debt agreements made in 2007.
Debt agreements are an increasingly important feature of Australia's personal insolvency system and a review of the 2007 changes is timely.
Additionally the Government is also moving forward with broad ranging reforms to the consumer credit market including the introduction of positive credit reporting and responsible lending laws.
These changes will allow lenders to better assess an individual's credit risk and will deter the extension of credit to consumers in an irresponsible fashion.
The new responsible lending obligations will be fully operational by 1 January 2011.
I am advised that an exposure draft of the Bill that will include changes to credit reporting will be released in the early part of this year.
I encourage you to continue to engage in this process once the exposure draft is released.
I also look forward to your support as we move towards reforming personal insolvency arrangements and as we embark on the further review of the Bankruptcy Act later in the year.
Thank you.
