Bankruptcy could be slashed to just one year, but is that a good thing?

A new Bill currently before Parliament could mean a radical change bankruptcy legislation, slashing the bankruptcy period from three years and one day to just a year.

In 2018, there have been more than 32,000 personal insolvencies across Australia, which is the fourth consecutive financial year that the tally has increased.

The government wants to boost entrepreneurialism and remove the stigma associated with bankruptcy which has spearheaded the push for the changes to current legislation.

So, here's a quick rundown on what the changes entail:

1. The three year and one day condition of bankruptcy will be scrapped in favour of being discharged after just 12 months.

2. Income will still be assessable for up to two years after discharge (so three in total) and contributions will still be payable during that time.

3. Any unprotected assets will still vest in the trustee who manages your administration. If the unprotected assets are not realised by the trustee during the bankruptcy period, they will continue to vest in the trustee for a minimum of six years after your discharge from bankruptcy. Further to this, the trustee can still apply to continue to have any unprotected assets vest in them indefinitely or until such time that the asset is sold or the trustee otherwise agrees to relinquish their interest in them.

4. A trustee can still lodge an objection to discharge which will effectively extend the length of the bankruptcy period.

5. You'll still need to request permission to travel during the 12 months. After you've been discharged, you'll no longer need to request consent to travel.

6. You'll be disqualified from being the director of a company for 12 months (assuming your bankruptcy isn't extended).

7. Professional licences and memberships may be still affected until discharge.

8. You'll still need to disclose your bankruptcy status when trying to obtain goods or services by cheque, account or credit above the prescribed credit limit of $5726 - failure to do so will still be a criminal offence.

9. Your credit report will still be impaired for two years after discharge or five years in total - whichever is greater. For the vast majority of people, their credit report will show a bankruptcy notation for five years which is no different to the existing legislation.

10. If the Bill is passed, the new law will commence six months after royal assent is received and will apply to all new and existing bankruptcies. So if you're already bankrupt - you'll be discharged after 12 months (or six months after royal assent if you've otherwise already been bankrupt for a year and your trustee has not lodged an objection to your discharge).

There are many positives to the new Bill, for example, it's thought that the proposed changes will reduce the amount of administrative costs ordinarily associated with bankruptcy.

However some have concerns about it being so simplified that it won't catch "rogue bankrupts" and may actually encourage phoenix activity - where a new company emerges from the collapse of another company through insolvency.

Statistics also reveal that less than 20% of people become bankrupt because of business-related reasons. Last year, 67% of people attributed their bankruptcy to unemployment or the excessive use of credit.

Of the 20% who cited business-related causes for insolvency, the majority ran businesses under a sole trader or a partnership structure, which you're otherwise able to do when bankrupt (provided any partnerships are created after the date of bankruptcy as all pre-existing partnerships will be dissolved by bankruptcy). In reality, the percentage of company directors affected by bankruptcy has historically been largely insignificant.

Only time will tell if the entrepreneurial aim of the new bill will be realised.

Get stories like this in our newsletters.