PRESS CONFERENCE - HURSTVILLE ELECTORATE OFFICE, SYDNEY
Tuesday, 25 August 2009Subject: Personal Bankruptcy Law Reforms
JOURNALIST: Can you outline the proposed changes to the bankruptcy bill please?
McCLELLAND: Essentially what we're trying to do is get debtors to get advice early and to negotiate early. To encourage that, we've increased the threshold from $2,000 to $10,000 before someone can file for bankruptcy. We've also increased the notice period from seven days to 28 days, to encourage more people to get advice and sit down and negotiate.
JOURNALIST: Why do you feel the changes are necessary?
McCLELLAND: Well, firstly, these are tough economic times which are impacting on more Australians. There was an 11 per cent increase in bankruptcies last year. Quite often, people become bankrupt through no fault of their own as unforeseen circumstances hit them.
We are also concerned that too many creditors are still using bankruptcy as a tool in debt collection as opposed to a last resort. So, the increase in the threshold from $2000 to $10,000 will be a disincentive for that to occur.
Similarly, the notice period - seven days to 28 days - will encourage more debtors to seek advice and sit down and negotiate.
At the end of the day, the evidence suggests that debtor agreements recover about 76 cents in the dollar whereas bankruptcy only recovers about 1.6 cents in the dollar. So it can be a better outcome all round.
JOURNALIST: A win-win here?
McCLELLAND: It can be a win-win if people get advice early, sit down and negotiate early with their creditors, there can be better outcomes all round, and that's what we're trying to achieve.
JOURNALIST: Why did you feel it was necessary to introduce these changes?
McCLELLAND: Well, certainly the economic circumstances are having a greater impact on more people. We're seeing people, not only as a result of credit card debt get into difficulty, but we're also seeing small business owners. On numerous occasions their principal contractor can go out of business which in turn will impact on small business operators which in turn impacts on their suppliers.
So, if we can get people operating more responsibly, recognising in these times that there are going to be more people affected by indebtedness, and encourage more negotiation, then there's going to be better outcomes all round.
That's essentially the thrust of what we're trying to achieve.
JOURNALIST: Regardless of the economic climate, did the $2000 figure need reviewing anyway?
McCLELLAND: That's a very sound point.
The $2,000 figure is in the order of over 10 years old so it clearly hasn't been indexed for higher incomes over that period. So it's something that needed updating in any event but, again, updating it in a way that we think will have creditors think, well look, what are the alternatives to sending this person bankrupt.
Bankruptcy should be a last resort. There should be other means to explore, such as debtor agreements or, in the worst case scenario, garnisheeing wages or arranging for a sheriff to confiscate assets.
But sending someone bankrupt has very significant consequences. Firstly, they stay bankrupt for a three year period and their credit record forever and a day is damaged. So, for a young person in particular, it can have a significant impact on their ability to get a car loan, a housing loan, or even a business loan.
So we really want to try and prevent people going bankrupt. Equally, there has to be a responsibility on those who are in debt to sit down, disclose fully their circumstances, and to negotiate agreements.
JOURNALIST: Are you hoping this is an assurance to some of those families and Australians that are struggling through this economic climate?
McCLELLAND: The people impacted by indebtedness are often those who over-extend themselves, abuse or over-extend their credit card entitlements, for instance. But, equally, there are a range of people who become financially troubled because of losing a job, because of illness, because they're a small business owner and someone they have a contract with has folded, impacting on them. So there's a whole range of reasons.
What we want to try and do is get a bit of good faith and fair play happening all round.
So we've increased the threshold from $2,000 to $10,000 and the notice period from seven days to 28 days to enable people to get advice. Equally, we've imposed some obligations on debtors so that if they fail to disclose their full assets and income, they can be liable to very substantial penalties. Indeed, we are increasing the penalties from three years to five years in some circumstances.
We are trying to encourage a culture of good faith all round. Early advice, early negotiation, full disclosure and good faith negotiations to try and get agreements that are in everyone's interest to recover as much as they can for the creditor. But in circumstances where someone becomes bankrupt through no fault of their own, the system is a little kinder to them.
JOURNALIST: Is that an admission that the current system is not fair?
McCLELLAND: I think the current system enables creditors to use the bankruptcy processes too easily as a tool in the debt recovery rather than a last recourse.
In other words, the fact that they can apply to make someone bankrupt in circumstances where they only owe $2,001 means that the resources of the Insolvency Trustee are engaged, it means the resources of the court are engaged and hence there are substantial costs to the taxpayer.
We think in those circumstances, they should be sitting down and negotiating with the debtor to arrive at a more satisfactory accommodation. Equally, from the debtor's point of view, they have an obligation to obtain appropriate advice, sit down with full disclosure and negotiate in good faith with a view to devising a strategy to repay their obligations.
JOURNALIST: Is that going to put creditors in a difficult position trying to get their money back?
McCLELLAND: We don't believe so. Creditors still have a whole range of tools. They can apply to garnish someone's wages. They can apply to a sheriff to enforce a debt by confiscating the assets of the person.
There are a range of tools that are available to creditors. And in worst case scenario, if someone owes more than $10,000, and despite the notice period hasn't made good, they haven't tried to negotiate an outcome in good faith, then there is still the means available for creditors to make someone bankrupt.
But we want that to be the last recourse because it has very significant consequences all around.
Firstly, it's likely that the creditor will only recover, on the figures, about 1.6 cents in the dollar but, secondly, from the debtor's point of view, they have a lifelong millstone around their neck which will impede them obtaining a loan for a house certainly, a car probably, and also probably a small business loan if they wanted to go into small business.
So, we want to get people acknowledging the difficulties early, obtaining advice early, sitting down and negotiating early, that's what we're about.
JOURNALIST: Going on the figures from last year, how many people will this affect?
McCLELLAND: The figures last year show that there were about 20 per cent of cases between that $2,000 and $10,000 limit. So, on the figures, we would think 20 per cent of people will avoid that bankruptcy.
But we would like to think that the encouragement to sit down and negotiate early, as well as the enhanced disclosure obligations are going to get more people out of bankruptcy because they will have to sit down and negotiate creditor agreements in good faith to avoid that occurring. So, the figures may be more than that.
We are talking about a significant number of people. Last financial year, there was a little over 34,000 people who went bankrupt in Australia. That was an 11 per cent increase last year and, obviously, we expect there will be an impact this year from the global economic crisis.
So we're trying to introduce these measures to relieve hardship in the immediate crisis, but also from a long term point of view to encourage this good faith negotiation to achieve strategies to repay obligations without that drastic consequence of people going bankrupt.
JOURNALIST: A lot of people, mortgage holders, have a lot more debt than $10,000, so is it really a big change?
McCLELLAND: Well, a lot of people, certainly mortgage holders, if they have their assets, are likely to be in a better position to negotiate a repayment schedule. But the vast bulk of people are being made bankrupt for relatively small amounts that have been accrued from over-extending their credit card entitlements for example. That's the great bulk of people.
Obviously, there's a range of others included in that, such as small business owners who through no fault of their own incur a bad debt with a business partner, supplier or purchaser.
But by and large, the bulk of those 34,000 people go bankrupt as a result of smaller consumer debts, as opposed to substantial amounts of money.
JOURNALIST: Shouldn't the creditors just be showing a bit of compassion?
McCLELLAND: There is, over time, a change in culture.
I must say that, by and large, creditors and debt collectors are modifying their practices. We want to encourage that widespread change in culture so that negotiation becomes the first option rather than commencing bankruptcy proceedings as a negotiating or debt collection tool rather than a last resort.
Thanks very much.
Ends
