Bankruptcy: What has changed since COVID-19

In an attempt to help individuals and businesses caught up in the economic fallout of the Coronavirus, some important temporary changes have been made to Australian Bankruptcy laws.

These measures came into effect on 25 March 2020 and include;

• Extension for Temporary Debt Protection (TDP)/Declaration of Intent (DOI)
• Extension of new bankruptcy notices

Temporary Debt Protection (A.K.A Declaration of Intent)

Temporary Debt Protection (TDP) or a Declaration of Intent to lodge a Debtor’s Petition (DOI) is a formal option, preventing recovery action by unsecured creditors for a set period.

Prior to the temporary COVID-19 response measures, a TDP would provide eligible applicants with 21 days of protection to:

• Seek appropriate advice
• Negotiate payment plans with creditors
• Consider long-term, formal insolvency options such as debt agreements, personal insolvency agreements and Bankruptcy

The 21-day protection period has now been extended to 6 months.

Pros and Cons of TDP

Aside from preventing unsecured creditors from taking further recovery action, other considerations include:

• The TDP is not recorded on the National Personal Insolvency Index (NPII)
• Secured creditors and their rights to any secured assets are unaffected by a TDP
• Some debts aren’t covered such as Child Support, Fines and HECS/HELP debt
• Creditors can use it to make the applicant Bankrupt after the protection period expires

It’s also important to note that applicants will be ineligible for this option if:

• They’ve had a previous TDP accepted in the last 12 months
• They’re currently in an active debt agreement or personal insolvency agreement OR
• They’ve been served with a Creditor’s Petition that has been filed through the Federal Circuit Court

Bankruptcy Notices

A Bankruptcy Notice is part of the legal process required when a creditor intends to make a debtor Bankrupt.

Prior to the temporary COVID-19 response measures, a creditor needed to comply with the following in order to apply for a Bankruptcy Notice against a debtor:

• Obtained a final judgment for an amount of $5,000 or more
• The judgment cannot be more than 6 years old

Once issued, The Bankruptcy Notice gives the debtor 21 days to comply from the date the notice was served. In the absence of a resolution, the debtor will have committed an Act of Bankruptcy, allowing the creditor to move forward with a Creditor’s Petition.

In response to the Coronavirus, the following changes now apply to Bankruptcy Notices issued on or after 25 March 2020:

• The debt threshold required for creditors to apply for a Bankruptcy Notice has increased from $5,000 to $20,000 and;
• The timeframe in which a debtor has to respond to a Bankruptcy Notice has increased from 21 days to 6 months

It’s important to note that these changes do not apply to Bankruptcy Notices issued before 25 March 2020.

Economic Response Package & Bankruptcy

The Australian Federal Government has announced a raft of economic relief and stimulus measures in response to this crisis and it’s important to understand how such payments may be treated in Bankruptcy.

Economic Support Payments (Stimulus payments) can’t be claimed by a bankruptcy trustee regardless of whether the bankrupt person received the payment before or after becoming Bankrupt.

COVID-19 Supplementary income payments are assessable as income under the Bankruptcy act. The same rules regarding compulsory income contribution assessments and the treatment of income earned before and after the date of Bankruptcy will apply.

Early Release of Superannuation – there is no change to how Superannuation or early access to Superannuation is assessed in Bankruptcy.

For those consumers and professionals seeking information about personal insolvency, it’s important to keep up to date with all new announcements and to seek assistance from suitably qualified insolvency professionals as needed.

Andrew Aravanis

Andrew is the founder and Principal at Aravanis, one of the largest registered bankruptcy trustee firms in Australia.

Aravanis is an award-winning firm offering free bankruptcy-related information specific to people’s individual situations.

If you’re looking for a more comprehensive outline of bankruptcy see article, what is bankruptcy, or call 1300 369 168.