Insolvency laws in Australia were a hot topic during Prime Minister Malcolm Turnbull’s three years in office. Affectionately referred to as the “free to fail” movement, Turnbull advocated for a reduction in the country’s bankruptcy discharge period from three years to one.
It is not the only time the issue has taken the forefront in Australia, which is known for having some of the most punitive bankruptcy regimes in the world. Lowering the discharge period was previously debated in the legislature several times without passage.
The Bankruptcy Act of 1966 outlines the provisions for debtors to file for bankruptcy. During the COVID-19 pandemic, provisional changes to the law were made. The temporary debt protection period was extended from 21 days to six months, and recovery action by unsecured creditors is prohibited for six months.
Now is an opportune time for the government to re-examine the discharge period as the global economy works hard to recover from the effects of the pandemic. There are several advantages to adjusting the period downward from three years to one.
Reducing the insolvency period from three years to one year can encourage entrepreneurial activity and reduce the stigma associated with bankruptcy. When an individual is in bankruptcy, it forces them into an exclusionary period, during which time they are extremely limited in business activities. They cannot act as a company director and are restricted in their access to finance, employment opportunities and the ability to travel overseas. Bankrupt individuals who are this severely restricted from what is considered routine business activity will have little opportunity to stimulate the economy through the creation of new companies and jobs.
Bankruptcy usually does not affect an individual’s current employment situation. However, it can count as a strike against them when applying for certain jobs in private industry. While it is illegal for a government agency to refuse to hire someone who has filed for bankruptcy or fire a current employee who files, the private sector is not subject to the same rules. Private employers are permitted to weigh a job applicant’s bankruptcy status as part of the hiring process, especially if the person would be responsible for company finances as part of their job duties.
Segmentation affects an individual’s credit by associating them with a higher risk to lenders. In doing so, the vicious cycle of debt could continue by subjecting these borrowers to riskier interest rates and higher-cost credit options.
Some people end up in bankruptcy through no fault of their own. Job loss or mounting medical bills for an unexpected illness or injury can quickly push someone beyond their financial means. Reducing the insolvency period would help people in this situation to recover more quickly.
One of the biggest arguments against lowering the discharge period is that it will result in volume increases for new bankruptcy claims. The Australian Financial Security Authority (AFSA) and private trustees can handle the expected volume increase in bankruptcy filings, so that should not be used as an excuse to delay further action.