Creditors who use the bankruptcy system to recover debts from individuals, including sole traders and directors who have given personal guarantees, face a higher bar under draft laws released by the federal government. Submissions on the exposure draft Treasury Laws Amendment (Personal Insolvency Amendments) Bill 2026 close on Tuesday 3 November.

The three changes

According to the Assistant Minister for Productivity, Competition, Charities and Treasury, Andrew Leigh, and an analysis by law firm HFW, the draft would:

  • Double the statutory minimum debt for involuntary bankruptcy from $10,000 to $20,000. HFW says the increase would take effect on 1 July 2027, with the threshold indexed to the Consumer Price Index each year from 1 July 2028. The minimum must be owed before a creditor can obtain a bankruptcy notice or present a creditor’s petition.
  • Extend the time to respond to a bankruptcy notice from 21 days to 28 days, giving debtors an extra week to obtain advice before non-compliance becomes an act of bankruptcy.
  • Stop debt agreement proposals counting as an act of bankruptcy. At present, presenting a Part IX debt agreement proposal, or creditors accepting one, can found bankruptcy proceedings.

The government has also said it will amend regulations so people can be removed from the National Personal Insolvency Index seven years after bankruptcy, rather than being listed permanently. HFW notes this measure is not in the draft bill and will be consulted on separately.

The government’s rationale

The minister’s 23 October release says most insolvencies stem from job loss, illness, relationship breakdown or business downturns, and that the higher threshold will help ensure individuals and small business owners are not forced into bankruptcy over relatively modest debts. “Bankruptcy should not be a life sentence,” Dr Leigh said. “People can find themselves in financial trouble through illness, losing a job or a business downturn. Our bankruptcy laws should recognise that a financial setback needn’t cast a shadow over the rest of someone’s life.”

What it means for creditors

HFW says that for creditors the reforms may narrow access to bankruptcy for lower-value debts and change the timing of enforcement, while debtors get more breathing room and less risk when they try to negotiate a Part IX compromise. Businesses that rely on bankruptcy notices to recover unpaid invoices or guarantee debts between $10,000 and $20,000 should consider what other recovery steps, such as court judgments and enforcement, or security taken up front, would be available to them.

The reforms sit within a broader review of personal insolvency. HFW points to a 2024 Attorney-General’s Department discussion paper which found that in 2021–22, 26.8% of personal insolvencies involved people with less than $50,000 in liabilities and less than $10,000 in assets, and which canvassed a new minimal asset procedure as an alternative to bankruptcy.

The changes apply to personal insolvency under the Bankruptcy Act 1966, not to company liquidations, and remain a draft that may change after consultation.

Sources: Media release from the Assistant Minister for Productivity, Competition, Charities and Treasury, 23 October 2026; HFW, 26 October 2026; CPA Australia Tax News, 29 October 2026.

This article is general information only and is not legal advice. Readers should seek advice specific to their circumstances.