COSBOA backs changes to bankruptcy laws

The Council of Small Business of Australia has thrown its support behind the Government’s proposed changes to bankruptcy laws, which would see the threshold at which a creditor can put a person into bankruptcy raised from $2,000 to $10,000.

The changes, which have been criticised by some sections of the banking industry, are due to be debated in the Senate today.

COSBOA chief Jaye Radisich says an overhaul of the Bankruptcy Act was long overdue, and argues the reforms and the lifting of the bankruptcy threshold should give small company creditors a change to get some return on their doubtful debts.

“The priority for small business is the ability to efficiently and effectively collect money that is legitimately owed. To that extent, proposed reforms increasing thresholds and providing a greater opportunity to negotiate the repayment of debts, is likely to result in better outcomes for Australian small business.”

While Radisich acknowledges that the increase in the threshold from $2,000 to $10,000 could cause some nervousness among small business owners with small debts to recover, she says the best chance of repayment results if bankruptcy is not declared.

“The easier it is for bankruptcy proceedings to commence and for people to declare themselves bankrupt, then the likelihood for a return to creditors is reduced.”

“The last thing small businesses need is a fire sale of assets and a liquidator taking a big cut before any creditor gets anything.

“Businesses recover consumer debts at a rate of 70c in the dollar if people are not declared bankrupt, as opposed to just 2c in the dollar if bankruptcy takes place.”

However, critics of the threshold increase are concerned that the changes make it harder for businesses to recover debts and are also worried debtors will be allowed to run up bigger debts without being held to account.

Pitcher Partners insolvency partner David Vasudevan has argued the higher threshold could leave the door open to abuse.

“A debtor could theoretically incur credit of $9,000 with 10 different creditors without any possibility of a creditor petitioning for his or her bankruptcy. Small businesses and credit providers that rely on the self-governing nature of bankruptcy could be in a far worse position by supplying credit to persons who are able to incur credit with impunity,” he wrote in an opinion piece in The Age late last year.

But Radisich says the benefits of boosting the threshold outweigh this risk.

“It is much more important to legislate to support the majority of people who do the right thing most of the time, instead of second-guessing the actions of the lowest common denominator.”

COSBOA also supports the move to increase the “stay period” (the time a debtor is allowed to take to organise their affairs before bankruptcy proceeding commence) from seven to 28 days.