Australian Government proposes targeted reforms to the Bankruptcy Act 1966 (Cth)

On 23 October 2026, the Australian Government released for consultation draft legislation proposing changes to the personal insolvency regime set out in the Bankruptcy Act 1966 (Cth). These reforms aim to rebalance creditor recovery rights and the ability of individuals in financial distress to compromise their debts without entering bankruptcy.

The exposure draft legislation published by the Australian Government on 23 October 2026¹ (Draft Legislation) proposes targeted changes to the Bankruptcy Act 1966 (Cth) (Bankruptcy Act) in three key areas:

1. The threshold debt for involuntary bankruptcy would double. Currently, the “statutory minimum” under section 5(1) of the Bankruptcy Act is AU$10,000. That sum (at least) must be owed by the debtor before a creditor can apply for a bankruptcy notice under section 41 and present a creditor’s petition under section 44 of the Act. If enacted, the Draft Legislation would amend section 5(1) and increase the statutory minimum from AU$10,000 to AU$20,000 on 1 July 2027 and, from 1 July 2028, this threshold would increase (or decrease) annually in accordance with movements in the Consumer Price Index (CPI) under proposed section 304B of the Draft Legislation.
2. Debtors would have longer to respond to bankruptcy notices. A debtor has 21 days to comply with a bankruptcy notice under the current law (21 days being the “statutory period” stated in section 5(1) of the Bankruptcy Act). The Draft Legislation increases that period to 28 days, giving debtors an additional week to obtain advice and respond before their non-compliance constitutes an “act of bankruptcy” under section 40(1)(g) of the Bankruptcy Act. This is significant because an “act of bankruptcy” can be used to found bankruptcy proceedings.
3. The consequences of pursuing a Part IX debt agreement would change. The Bankruptcy Act currently provides that merely presenting a debt agreement proposal can constitute an “act of bankruptcy” (as can creditor acceptance of a debt agreement proposal). The Draft Legislation proposes to remove the ability to found bankruptcy proceedings on these grounds, encouraging eligible debtors to explore debt agreements as an alternative to bankruptcy.

For creditors, the proposed reforms may narrow access to bankruptcy for lower-value debts and alter the timing of enforcement. For debtors, they provide greater breathing room and reduce the bankruptcy risk associated with attempting a Part IX compromise.

The reforms set out in the Draft Legislation form part of the Government’sbroader consideration of Australia’s personal insolvency framework.

In July 2024, the Attorney-General’s Department released the minimal-asset-procedure-discussion-paper (MAP Discussion Paper), which noted that in 2021–22, 26.8% of Australian personal insolvencies involved individuals with less than AU$50,000 in liabilities and less than AU$10,000 in assets and considered introducing a Minimal Asset Procedure (MAP) as an alternative to bankruptcy for low income debtors with minimal realisable assets, where bankruptcy would be unlikely to generate a return to creditors. 

Under the proposed MAP model canvassed in the MAP Discussion Paper, the procedure would run for 12 months and would be subject to eligibility requirements including:

• a maximum debt threshold of AU$50,000;
• an asset threshold of AU$10,000 (excluding specified tools of trade and vehicles);
• an income-based eligibility test; and
• a restriction limiting access to the MAP to once in a debtor’s lifetime.

Separately, the Australian Government is progressing reforms to limit listings on the National Personal Insolvency Index to seven years after bankruptcy. This measure is not contained in the Draft Legislation and will be consulted on separately.

We are monitoring these developments closely.

Our Australian team has over 40 years of experience advising companies, creditors, directors and shareholders on insolvency and restructuring matters. We have deep expertise in all aspects of restructuring and insolvency law, including restructurings and workouts, formal insolvency processes, insolvency litigation, cross-border insolvencies and complex stakeholder engagements. You can find more information on our restructuring and insolvency practice here.

If you wish to discuss this article, or other questions of Australian restructuring and insolvency law, please contact the authors or your usual HFW contact(s).

Bailey Robinson, Law Graduate, assisted in the preparation of this briefing.

Footnote

1. You can access the Draft Legislation here. The Australian Government’s accompanying Press Release can be located here.