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The 3 pressures contributing to the surge in personal insolvency
There are critical financial pressures responsible for the recent increase in personal insolvencies, a specialist warns, adding that the situation is expected to worsen by the end of the year – with potential ramifications for small-firm owners.
Grace Robbie
Stewart Free, a partner at Jirsch Sutherland specialising in insolvency and business, highlighted that the recent surge in personal insolvencies can be attributed to three significant financial pressures individuals face. He also advises that the current situation is projected to worsen both before and after the Christmas period.
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This alert is based on the latest personal insolvency data published by the Australian Financial Security Authority, which showed a noticeable increase in insolvencies during the June quarter and a further rise in July.
The data indicated that during the three months leading up to June 2024, there were 2,947 new personal insolvencies, an increase from the 2,705 recorded in June 2023. Additionally, it uncovered that in July of this year, 1,157 individuals became formally insolvent, marking an 8.9 per cent uptick from the previous month.
Free revealed that the three key stressors contributing to financial distress are “tax debt, the inability to raise further finance, and strata debt”.
“The ATO’s Director Penalty Notices (DPNs) are catching up with current and former company directors, which is causing an increase in business-related personal insolvencies, plus we’re seeing a spike in business owners and individuals who have exhausted all financing options in a bid to pay debts.
“That’s also leading to ballooning credit card debt, which is increasingly pushing people to the brink and over the edge as they rely on their cards to cover business and day-to-day living expenses,” Free said.
In addition to this trio of stress, Free pointed out that the escalating strata debt presents an additional source of pressure, which is driving an increasing number of individuals towards bankruptcy.
“More and more property owners are falling behind paying their levies, and that’s led to a spike in strata debt-related bankruptcies,” he said.
As the holiday season approaches, Free anticipates that this period will persistently elevate personal insolvency rates.
“Christmas can be a major financial trigger – and currently, there’s the added stress of a cost-of-living crisis. I foresee the situation worsening because of the financial ‘hangover’ that comes from over-reliance on credit cards and buy-now-pay-later schemes,” he said.
In the coming months, Free also anticipates a significant rise in the submissions of personal insolvency agreements (PIAs) so individuals and businesses can address overwhelming debts and progress in financial matters.
“It’s a very effective bankruptcy alternative for individuals who are financially insolvent.
“In the three months to June 2024, there was a 74.3 per cent jump in PIAs, and while the numbers are still quite low, I believe there’ll be an increase as people realise there are other options instead of having to declare bankruptcy. But regardless of the solution, it’s important to remember there are options to help individuals deal with unmanageable debt and move forward in life,” he said.
Free offers legal professionals advice on navigating the time leading up to Christmas, which may help mitigate the impact of personal insolvency and stay afloat during this challenging time.
“Professional advisors such as lawyers and accountants need to be cognisant of the upcoming Christmas period. As clients will most likely be tightening their own purse strings, advisors need to forward plans and budget for [the] same.
“Just like the old saying that a plumber’s house has leaky taps, advisors need to heed the advice they give so often to their clients and turn that analytical ability inwards. Don’t wait till it’s too late to talk to someone. The earlier you act, the more options that are available,” he said.
