Cutting the time spent in the naughty corner is not enough…

No one likes the stigma of being labelled ‘a bankrupt’, and currently in Australia that lasts for a minimum of three years. But the Federal Government is proposing to cut the bankruptcy period to 12 months.

That’s all well and good but there also needs to be a change in the way bankruptcy is viewed in this country if we want to be saved by ‘innovation’.

A very short list of reforms

The proposal to shorten the bankruptcy period is contained in a suite of insolvency law reforms proposed by the Productivity Commission. These were released at the same time as the government’s National Innovation and Science Agenda.

The reforms include:

· aligning licensing and industry restrictions with the one-year default period

·  allowing a bankrupt to obtain credit or travel overseas after one year, subject to any extension for misconduct

· retaining the ability to extend the bankruptcy period to eight years

· keeping a permanent record of the bankruptcy

· making the bankrupt help administer their bankruptcy, even after discharge

· retaining the bankrupt’s obligation to repay their debt for three years, with the possibility of an extension to five or eight years.

National personal insolvencies (quarterly)

Changes criticised

The proposed changes have been criticised as making it easier for debtors to avoid the consequences of their mistakes or misconduct.

Nevertheless, a bankruptcy can be extended to five or even eight years if the bankrupt fails to comply with their obligations. A failure to list assets and liabilities can result in the bankruptcy continuing until the bankrupt complies, which can mean an indefinite period.

At the same time, bankruptcy continues to involve the bankrupt losing their passport, most of their property, including the family home, any cash, shares, and anything other than household furniture and a cheap car.

The obligation to repay creditors from income above a certain level will remain in place but restrictions on obtaining credit and travel have been reduced.

Good reasons to have balanced laws

Given that bankruptcy can release a debtor from obligations to repay many millions of dollars, there has to be accountability and consequences. No argument there, but it is a matter of degree and of balance.

Australia is viewed internationally has having a harsh approach to unpaid debt and that’s unlikely to change. The new rules don’t alter the penalties and criminal sanctions, including imprisonment, for breaches of many of a bankrupt’s obligations.

What the government is proposing is just a shorter period in the naughty corner.

New attitudes needed

However, punishment and deterrence can only achieve so much. The danger is that innovation will be stifled if the consequence of trying a radical new idea that doesn’t work is jail, or a long period of bankruptcy and the loss of most, if not all, of a person’s property.

That’s why other countries are focusing more on rehabilitation and a constructive approach to business rescue.

While the government’s innovation agenda is trying to shift the balance in favour of risk and innovation – with its potential to stimulate economic growth – and to move the issues away from retribution and failure, merely reducing the period of bankruptcy won’t be enough.

Creditors need a predictable, transparent and fair system for collecting their debts, and the stigma of bankruptcy, which invariably is overlaid with suspicions about a bankrupt’s morality, needs to change to encourage an entrepreneurial and innovative business culture.

The laws will be easier to change than the attitudes.