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Thursday, 27 September 2001
Page: 28240


Senator BOLKUS (4:36 PM) —I seek leave to incorporate my second reading speech in Hansard.

Leave granted.

The speech read as follows—

Introduction

The Bankruptcy Legislation Amendment Bill 2001 and the Bankruptcy (Estate Charges) Amendment Bill 2001 were introduced in the House of Representatives on 7 June 2001.

In introducing the principal Bill, the Attorney-General stated that bankruptcy had been devised “as a shield that might be used, in the last resort, by an impecunious debtor to seek relief from his or her overwhelming debts. Over the years, some unscrupulous debtors have learned to use bankruptcy as a sword to defeat the legitimate claims of their creditors”.

That sentiment—the idea that bankruptcy is used by the rich rather than the broke—has been on the rise over the previous year given the prominence which has been given in the media to high-profile bankrupts, including a number of lawyers who appear to be living the high life while officially being bankrupt—some of them more than once.

If the bankruptcy law is being abused, it is appropriate that it be reviewed and amended to ensure that loopholes cannot be exploited.

Labor certainly supports those measures in the Bill which will make it harder for otherwise well-off people who are using bankruptcy improperly.

However, despite the hype generated by the Attorney-General, there is little in this Bill which will have any substantial impact on cracking down on the top end of town.

To the contrary, much of the `reform' is squarely directed at low income people who are forced to go into bankruptcy because they can't pay the debts they have incurred.

It is a Bill which is typical of a government that protects the greedy, not the needy.

Background

The last major overhaul of bankruptcy legislation was in 1996, shortly after the Coalition came to office. The 1996 Bill was substantially based on Labor's 1995 Bill and incorporated amendments recommended by the Senate Legal and Constitutional Legislation committee in September 1995.

This Bill does a number of things.

It repeals the existing optional 7 day cooling-off period introduces a mandatory 30 day cooling-off period.

It gives Official Receivers a discretion to reject a debtor's petition where it appears that, within a reasonable time, the debtor could pay all the debts listed in the debtor's statement of affairs and that the debtor's petition is an abuse of the bankruptcy system.

It abolishes early discharge from bankruptcy.

It will make it easier for trustees to lodge objections to a person's discharge from bankruptcy and harder for bankrupts to sustain challenges to objections.

It clarifies that a bankruptcy can be annulled by the Court whether or not the bankrupt was insolvent when a debtor's petition for bankruptcy was accepted.

It doubles the current income threshold for debt agreements, to allow and encourage many more debtors to choose this particular alternative to bankruptcy.

Other changes proposed by the Bill streamline the operation of the Act or are a consequence of the Insolvency and Trustee Service of Australia (ITSA) having become an executive agency.

The Bankruptcy (Estate Charges) Amendment Bill 2001 amends the Bankruptcy (Estate Charges) Act 1997 to exempt any surplus in a bankrupt estate from the scope of the realisations charge, remove current payment obligations for the interest charge and the realisations charge if the amount otherwise payable is less than $10 in a charge period, close some charge-avoidance opportunities and simplify some machinery provisions of that Act. These amendments are technical and facilitative in nature and Labor will support them.

While Labor supports the need for bankruptcy reform, there are a number of aspects which are less than satisfactory which I now wish to touch on.

Consultation

First, concerns were expressed during the Senate Committee hearing on this Bill that, in drawing up the reforms, the government paid little attention to those organisations who most closely represent the interests of those people for whom the bankruptcy legislation exists—low-income people.

When somebody comes to the realisation that they can't meet their debt repayments—it may be that they have too many credit cards and they just can't cope with the financial situation in which they find themselves—one of the first people they often see is a financial counsellor.

These people are at the coalface of our personal insolvency system. Often, by visiting a financial counsellor, it is possible to provide people with assistance to budget their way out of debt. Other times, the only option is bankruptcy.

I would have thought that, in framing a personal insolvency system, one of the most important groups of people to listen closely to would be financial counsellors. But the Wesley Community Legal Service expressed its view that “financial counselling organisations were not consulted properly” and that “proper consultation with interested and relevant community based welfare organisations did not occur but rather lip service was paid to a few select organisations.”

The detailed provisions of the Bill—which are targeted more at the low-income bankrupts who are in over their heads than the bankrupt barristers who sit back in their harbourside mansions—reflect that lack of interest in the experience of financial counsellors. As the Wesley Community Legal Service submitted, the Bill will “disadvantage many of the poor in society and their families” while debt collectors stand to gain.

That is a shocking indictment of a government which has professed to govern for all Australians but instead has been caught time and time again knocking down those who are least able to stand up for themselves.

Cooling off period

While Labor will support the government's proposal to repeal the existing optional 7 day cooling-off period in favour of a mandatory 30 day cooling-off period, this proposal will not come without potential problems.

First, it should be noted that not all debtors are subject to the cooling off period.

Debtors excluded from the requirement for a cooling off period are:

· partnership debtors;

· deceased estates;

· debtors who carried on a business at any time in the 30 days preceding the petition;

· debtors the subject of a creditor's petition or of a specified legal proceeding which is scheduled for substantive hearing within 60 days of the date of the debtor's petition; and

· debtors who, in the 12 months before petitioning, unsuccessfully attempted to make alternative arrangements under the Act.

One of the effects of these exclusions is that, while business people who go broke will not be required to conduct further negotiations with creditors in the 30 days subsequent to lodging a bankruptcy petition, low income creditors—who make up the bulk of the work performed by ITSA—will.

As the Law Council of Australia pointed out, it is difficult to see the need for what they described as “a complex and administratively difficult procedure which will act as a condition precedent to becoming bankrupt”.

In fact, the Law Council of Australia went further then this—to seriously doubt that these provisions would have any positive effect for those who it is most intended to benefit—the creditors:

“What will happen is that people will simply file their debtor's petition, go away and forget about it, and 30 days later they will be bankrupt and they will be none the wiser and the creditors will be none the better off.”

While this is one scenario, credit counselling groups have raised the spectre that the amendment will lead to greater harassment of genuinely broke individuals by debt collectors within the 30 day period.

Credit counselling agencies are already stretched to the limit will be even further tested by clients who come back to seek assistance during this 30 day period when approached by creditors to withdraw their bankruptcy petitions and to make alternative arrangements.

In this respect, the proposals probably fail to give full weight to the fact that bankruptcy is already an absolute last resort for people who are unable to pay their debts. The fact that bankruptcy carries with it very serious consequences not only in relation to one's own creditworthiness for years to come, but also the social stigma, means that it is genuinely a last resort and not entered into lightly. ITSA already provides information to potential bankrupts on a range of less draconian alternatives to bankruptcy.

While the government has not made out a convincing case either for the need for an extended cooling off period or its likely effectiveness, Labor will not oppose this change. We will, however, be very interested to see whether in the next few years it has any positive effects on arresting the rate of bankruptcies throughout Australia.

Early discharge

The Bill also proposes to abolish the provisions which allow early discharge for low income bankrupts.

The first point to make is that those who will be affected by this measure will be among the most vulnerable in our society. Therefore you would think that the government should present compelling evidence why it is necessary for the good operation of bankruptcy law in this country that the provisions be abolished.

The government has not made a convincing case at all for the abolition of early discharge.

Administrative early discharge provisions were introduced in 1992 in response to concerns that low-income earners did not have any real capacity to avail themselves of the existing early discharge provisions that required an application to the Federal Court. At that time, only a very small proportion of bankrupts availed themselves of the early discharge provisions, because of the costs involved with making an application to the court. In almost all cases where early discharge was sought, the order was granted.

In respect of early discharge, the second reading speech tabled by Senator Bob McMullan on 22nd August 1995 stated:

“Commonly, persons who succeed in obtaining orders for discharge have become bankrupt as a result of failed business activities, and seek early discharge so as to enable them to resume such activities. These are usually also persons who have the capacity to contribute to the estate from income, but do not do so. The proposals in the Bill will restore equity to the operation of the early discharge system, and the eligibility and disqualification criteria are designed to ensure that where a person has become a bankrupt because of commercial culpability, he or she is disqualified from early discharge.”

Under the current early discharge provisions, a bankrupt may apply for early discharge after 6 months from the time when he or she files a statement of affairs with the Registrar.

The eligibility criteria are that:

· the bankrupt has no or insufficient divisible property to enable a dividend to be paid,

· the bankrupt has not disposed of property in a transaction that is void against the trustee, and

· the bankrupt earns an income that is less than the actual income threshold amount applicable to him or her at the time the application for early discharge is made.

Disqualifying criteria include where:

· the bankrupt has previously been a bankrupt;

· the unsecured liabilities of the bankrupt exceed 150% of his or her income in the year prior to the date of bankruptcy;

· more than 50% of the bankrupt's unsecured liabilities are attributable to the conduct by the bankrupt of business activities; and

· the bankrupt has given false or misleading information about his or her assets, liabilities or income.

From these qualifications and disqualifications, it is clear that the abolition of the early discharge provisions will only affect low-income earners and only in respect of their first bankruptcy.

Early discharge is not available in respect of second and subsequent bankruptcies.

There is no evidence that these provisions are being abused.

Public hearings by the Senate Legal and Constitutional Committee into the Bills were characterised by a complete lack of evidence as to the need for the abolition of the early discharge provisions. Mr Donald Costello, Acting Adviser, Insolvency and Trustee Service Australia, who provided evidence to the Committee on the policies underlining the proposed changes, summed this up when he said:

“There are no statistics which would be available to help make a decision as to whether or not early discharge is an appropriate regime to have. All we can provide is feedback from Credit Union Services Corporation of Australia Ltd, which is a significant lending group representing a substantial number of credit unions, plus persistent correspondence from mainly small business creditors over the years who say that it is too easy for people to walk away from their debts.”

I believe that the abolition of these provisions is actually an expression of this government's attempt to divide Australians by scapegoating the most disadvantaged.

I am confident that Australians will reject the negativity of this government—just as Northern Territorians rejected attempts by Brian Burke to divide the Northern Territory community by running on race issues.

The key feature of the early discharge provisions is that they were designed to deal with the increasing number of consumer bankruptcies which were due “more to misfortune than misdeed”.

This is happening to Australians across the country. With an explosion in the use of credit cards over the last decade, more and more people have access to easy credit and more and more people are running into financial trouble—so much more so now that Australians are faced with paying an extra 10% on everyday items whenever they go to the cash register.

And what is this government's approach? Instead of recognising that their policies have forced greater financial hardship on individuals and small businesses—and in many cases sent them to the wall—this government is now in denial that people run into debt trouble not because they are irresponsible about spending their money because the pressure on them is so great that they are driven into debt.

In introducing this Bill, the Attorney-General said:

“The provisions were targeted at a new category of bankrupt—consumer debtors with low asset backing who over-extend and then cannot repay their debts. However, many believe that bankruptcy in this group is due more to lack of financial responsibility than to misfortune.

This is a cold and heartless statement from a cold and heartless government—one which has inflicted so much hardship on struggling Australians and which then seeks to blame them for that hardship.

Well, Australians are sick and tired of this heartless government, and they are responding to Labor's message that more needs to be done to improve their living standards, to increase their access to public health services. Labor will not blame struggling Australians for the hardship that this government has visited upon them. We recognise the problems they are facing and will act to fix them.

So Labor does not support the heartless philosophy behind the abolition of these early discharge provisions and believes that no compelling justification has been advanced for their abolition.

Instead, Labor will seek to amend the Bill to retain the early discharge provisions but to allow early discharge only after two years.

This proposal will create a greater incentive for potential bankrupts to enter into alternative arrangements—such as debt agreements—to avoid bankruptcy while still providing some relief for low-income debtors who have bitten off more than they can chew by virtue of the increased difficulties forced upon them by this government.

Offence of incurring debts in two years prior to bankruptcy

The Bill also seeks to amend section 265(8) of the Bankruptcy Act, which provides that:

A person who has become a bankrupt and, within 2 years before he or she became a bankrupt and after the commencement of this Act, has contracted a debt provable in the bankruptcy of an amount of $500 or upwards without having at the time of contracting it any reasonable or probable ground of expectation, after taking into consideration his or her other liabilities (if any), of being able to pay the debt, is guilty of an offence and is punishable, upon conviction, by imprisonment for a period not exceeding 1 year.

The Bill proposes to amend this section by removing the minimum threshold requirement of $500.

The government says that the amendment will prevent the situation arising where a person could not be prosecuted where, before bankruptcy, they went on a spree and ran up a number of debts of less than $500 each but who at the time had no “reasonable or probable ground or expectation of being able to pay the debt”.

The government also claims that the amendment will bring the Bankruptcy Act into harmony with the equivalent Corporations Law provision.

Labor's concern is that the abolition of the threshold may result in the prosecution of debtors who have incurred small debts—of amounts less than $500—for example, in respect of unpaid utility bills or overdue rent payments.

This is more evidence that the government is out of touch with the basic needs of struggling Australians. The inability to meet the costs of these necessities of life should not result in the possibility of prosecution.

While there is an interest in bringing the insolvency law into harmony with the Corporations Law, the approach should not be inflexible. After all, corporations do not have to incur basic personal expenses necessary to live. People do.

Accordingly, Labor will seek to amend the section so that a person cannot be prosecuted for incurring a debt in respect of a reasonable or necessary personal or household expense without any reasonable ground of expectation of being able to pay the debt.