Call to seek help early as avalanche of bankruptcies looms

Australia is facing a potential avalanche of personal insolvencies once the government relief measures expire, says bankruptcy trustee and Jirsch Sutherland Partner Malcolm Howell.

According to the latest Australian Financial Security Authority (AFSA) figures, the average number of people entering into personal insolvency each fortnight between July 1, 2019 and March 22, 2020 was 844. The number of people who entered into a new personal insolvency fell from 1,019 between March 23 and April 5, 2020 to 732 people between April 6 and April 19. The number involved in businesses also fell, from 252 to 155. ‘Other services’ and construction were the most common industries for people in this scenario.

“We’re likely to see a significant increase in business-related personal insolvencies as a result of the economic impact of COVID-19,” says Howell. “A lot of small-business owners often use personal finances for business borrowings – including using their homes as a guarantee – which makes them vulnerable at a time like this.”

Howell says that the insolvency industry is bracing for a wave of personal insolvencies six to nine months down the track and that the Federal Government initiatives around bankruptcy will “buy people time to get their affairs in order”.

In an attempt to assist individuals, the Government is temporarily increasing the minimum amount of debt required for creditors to initiate bankruptcy proceedings against a debtor from $5000 to $20,000. The timeframe the debtor has to respond to a bankruptcy notice will also be temporarily extended from 21 days to six months.

“Individuals and business owners will have more breathing space thanks to these changes to Australia’s insolvency laws,” Howell says. “But it doesn’t mean they should put off seeking advice if they find themselves experiencing financial stress. Our message remains the same: seek advice early. The relaxed insolvency laws mean you have six months to decide what the best solution is.”

Howell adds bankruptcy isn’t something to be ashamed or scared of: “It’s a result of circumstances and sometimes it’s the only way to recover and to maintain your mental health and wellbeing, and that of your family,” he says. “Financial pressures affect everybody in the family, not just the individual concerned.”