New reforms welcomed after significant jump in bankruptcies
By John Collett
The number of people entering personal insolvency in the year to June 30, 2024 was 20 per cent higher than the preceding financial year, as more people find themselves unable to repay debts.
Personal insolvency includes bankruptcies and debt agreements, and a relatively small number of insolvency agreements. These include wage earners and owners of unincorporated businesses, which primarily include sole traders and partnerships.
Tim Beresford, the chief executive of the Australian Financial Security Authority, says the greatest risk to those in financial stress is to seek financial advice from untrustworthy sources.Credit: Patrick Durkin
A likely reason for the spike, apart from higher interest rates, is the Australian Taxation Office’s resumption of collection of outstanding taxes from small businesses following its moratorium on debt collection during COVID-19.
The Australian Financial Security Authority (AFSA), the federal government agency responsible for regulation and management of personal insolvency, says 44,000 people had a bankruptcy, debt agreement or insolvency agreement registered with the authority in 2022-23, the latest available figures.
Of the $14.3 billion of debt, about $2.6 billion was owed to the big four banks, and $2 billion to the Australian Taxation Office, the single largest creditor.
Banks and the ATO are accommodating with repayment plans as they want to help those in trouble get back on their feet. Many thousands of people who are struggling with debt have informal debt agreements with their lender or lenders that are not registered with AFSA.
Tim Beresford, the chief executive of AFSA, says the minimum time a bankruptcy can last is three years and one day from the start of bankruptcy. When the bankruptcy ends, credit reports will continue to show the bankruptcy for two years.
Bankrupts cannot be a director of a company. They have to get permission from the trustee to travel overseas, but most receive it, Beresford says.
He says they may not be able to be employed in occupations that have rules concerning “fit and proper” persons, including when they come out of bankruptcy.
The names of those who were bankrupt remain on the National Personal Insolvency Index permanently. However, the Albanese government said this week it will introduce reforms to make the system fairer.
There has been a rise in people filing for bankruptcy.Credit: Bloomberg
Key proposed reforms include reducing the period a bankruptcy is recorded on the Index to seven years from the date the bankruptcy is discharged.
Under the proposed reforms, the threshold for involuntary bankruptcies would increase from $10,000 to $20,000, with the threshold to be indexed each year. Most enter bankruptcy voluntarily.
Stephanie Tonkin, the chief executive of the Consumer Action Law Centre, welcomes the planned reforms, saying it has been far too easy for a person in debt to be forced into bankruptcy.
The AFSA’s Beresford says the greatest risk to those in financial stress is to seek financial advice or loans from untrustworthy sources, such as unlicensed pre-insolvency advisers offering debt solutions.
“People in this situation are often vulnerable… and sometimes instead of reaching out to a trusted adviser will search on the internet to see who can help them, only to end up in a more difficult situation,” he says.
The National Debt Helpline can be contacted on 1800 007 007.
- Advice given in this article is general in nature and is not intended to influence readers’ decisions about investing or financial products. They should always seek their own professional advice that takes into account their own personal circumstances before making any financial decisions.
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