Three year ‘imprisonment’ for bankruptcy debt

Australia has historically been seen as severe in its approach to unpaid debt and opposition to changing the 3 year period of time before bankruptcy discharge indicates that this sentiment is still strong; unless there are other agenda$ at play.

As an example, the colony of Victoria was one of the last jurisdictions in the world to oppose the removal of debtors’ prisons.

So, if a person in the tourism business suffers the consequences of, say, continued bad weather, and is made bankrupt for a debt of $10,000, they will be bankrupt and restrained from continued business for at least 3 years.

In contrast, if the person had operated through a company, and left $1m owing to creditors; they can immediately start over.

The Australian government had proposed to reduce that 3 year period to one, in 2019, in common with England and other jurisdictions, but the legislative process has stalled.

The government had also proposed to restrict directors who failed to comply with their insolvency law obligations but the government ultimately agreed that this would be too harsh, unless they went bankrupt as well.

Australia’s history of its attitude to unpaid debt

This is the subject of a recent article revealing that 19th century Victoria has the honour of holding out as one of the last bastions of the debtors’ prison, which at the time, ‘flew in the face of international momentum for its abolition’.*

A woman in Victoria was badly injured at work, could not pay for her medical attention and was jailed

The article opens with the story, in 1864, of a young woman in Victoria who was badly injured from a boiler explosion at her work. She was treated by a doctor for a severe skull fracture, and then hospitalized for 5 weeks. She was then sued by the doctor for unpaid fees, which she could not pay because of her incapacity and consequent lack of income. A verdict was given against her for £10; in default of payment, she was imprisoned.

Debtors’ prisons

The woman’s imprisonment occurred towards the dying days of debtors’ prisons in Australia, and England and comparable jurisdictions, though the colony of Victoria held out. The article explains the resistance to the repeal of debtors’ prisons in terms of social and class conflict at that time in Victoria, referring to the law’s ‘criminalisation of debt and poverty’, defying ‘the rapid advancement of democratic and egalitarian principles in the fledgling colony.

Social attitudes to unpaid debt have generally ameliorated over time. Bankruptcy nevertheless still prompts negative and punitive responses even if not quite as they were in the colony of Victoria in the 19th century.

The law supports this. And while many people operate through a company, recent research suggests that there are more ‘business bankruptcies’ than have previously been recorded.[2]

One year bankruptcy

The resistance to the reduction in the period of bankruptcy to one year may, now, or in time, be seen in similar terms. The current debate does not quite revert to the re-introduction of debtors’ prisons but brings out concerns about one’s personal responsibility in incurring debt, and the moral and legal obligation to repay it, coupled with concerns about ‘rogue bankrupts’ who manage to avoid the consequences of their bankruptcy.

Given the significant legal concession offered to a debtor by bankruptcy, the need to maintain confidence in the integrity of the process is important.

At the same time, bad cases are said to make bad law and a universal 3 year period to ensure that morality is maintained and debt is not incurred irresponsibly, and that ‘rogues’, however defined, are caught may be unfair, and unproductive.


The outcome of the banking inquiry may put the decision to borrow in perspective. Even before that, the rise in the numbers of consumer insolvencies over the last decades has prompted a change in focus in bankruptcy law. 3] Historically, while the interests of creditors have constituted the primary objective of insolvency regimes, the rise in the number of non-business debtors has forced countries to re-focus on them.

The World Bank argues that

‘since most western societies accept, if not encourage’ the benefits of lending, the insolvency regime should be viewed as representing ‘a sort of trade-off for deregulation of consumer lending. If natural persons are to be exposed to inevitable risk that they do not—and likely cannot— understand or avoid, insolvency restores fair equilibrium by offering insurances against those risks, with the “premiums” financed through small and appropriately distributed increases in the costs of credit’.[4]

That encouragement to borrow is evident with Afterpay and the like.

And the reality is that creditors receive very little if anything at all out of bankruptcies, and “whether bankruptcy lasts for 3 years, 1 year or 10, or 3 months”, that outcome will not change: What’s bankruptcy all about?

Perhaps there are other industry agenda$ at play?

* Contrary to the Spirit of the Age: Imprisonment for debt in Colonial Victoria 1857-90, Boyd, Ramsay and Ali, [2019] 42(3) MULR 737.

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