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Reducing the default period of bankruptcy from three years to one year would make it ripe for misuse, says one professional accounting body.
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Government warned against making bankruptcy an ‘attractive option’
17 February 2021
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Chartered Accountants Australia and New Zealand has urged the government to abandon plans to reduce the default period of bankruptcy from three years to one year, arguing that it is a knee-jerk reaction to a possible increase in personal insolvencies in the wake of COVID-19.
“We do not consider that the current economic circumstances should be a trigger for change,” said CA ANZ in its submission to the Attorney-General’s Department.
“Any change to the bankruptcy system should be based on the merits of that change, not on the economic landscape at a given point in time.”
CA ANZ’s response comes after the Attorney-General’s Department released a discussion paper last month to consider reducing the automatic discharge period to one year in a bid to reduce stigma from bankruptcy, encourage entrepreneurs to re-engage in business, and encourage people to pursue their own business ventures.
However, the professional body believes there is little merit in reducing the default period, noting that it would instead open bankruptcy up for misuse by debtors to defeat creditors.
“Reducing the default period to one year will damage the integrity of the financial system with bankruptcy becoming a more attractive option, be misused to defeat creditors and make credit harder to access for all,” CA ANZ said.
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CA ANZ also believes that reducing the default period to one year will do little to reduce the stigma for bankruptees, noting that records of bankruptcy or managing debt through a personal insolvency agreement is held in perpetuity on the National Personal Insolvency Index (NPII).
It also disagrees on how a reduction would encourage entrepreneurs to try again, pointing to how the bankruptcy system already allows a debtor to earn income and commence or continue trading as a sole trader while bankrupt.
Instead, CA ANZ believes that public records on the NPII should be aligned with the period that a record is kept on a debtor’s credit file to reduce the stigma of bankruptcy.
It also believes a viable alternative to simply reducing the default period would be an early release mechanism that is applied for by the trustee.
The early discharge mechanism would include restrictive eligibility criteria that requires debtors to co-operate with the trustee, have no bankruptcy notices issued against them and have less than $250,000 in total liabilities.
“Eligibility for such a mechanism should be narrow and application for early discharge to be at the discretion of the trustee on completion of their investigations,” said CA ANZ.
“Such a mechanism will preserve the integrity of the system, making sure debtors do not slip through the cracks, by automatic discharge, when there are outstanding issues or investigations are ongoing.”
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