Having worked in multiple roles in a non-banking financial company, I have witnessed firsthand a large number of people declaring bankruptcy, and have seen the impact it can have on both the individual and on business.
On the individual side of things, I firmly believe declaring bankruptcy puts you just one step away from homelessness. In doing research for this blog post, I came across a few statistics from the Australian Financial Security Authority (AFSA) about bankruptcy in the 2013-14 financial year:
- Over 17,000 people declared bankruptcy in the 2013-14 financial year, and less than 11,000 people entered into other personal insolvency solutions such as Debt Agreements or personal insolvency arrangements
- Over 2,300 debtors entered into personal insolvency solutions due to economic conditions
- 8,418 people entered into personal insolvency agreements due to unemployment or loss of income
- 6,999 entered into personal insolvency arrangements due to excessive use of credit
- 38% of debtors were aged between 35 – 49
These statistics alone show that whilst the inability to deal with credit is certainly a contributing factor to financial hardship, it is often a sudden change in circumstances that lead to someone needing to either declare bankruptcy or enter into another personal insolvency arrangement.
Perhaps, the thing that concerns me most about these statistics, is that the majority of people needing help financially declare bankruptcy as the first option, and they aren’t what I would consider old, meaning the impact of this one decision will continue to haunt them for the rest of their life.
Based on my experience, and what I see at Debt Cutter, I know bankruptcy can generally be avoided by pursuing other insolvency options. These less drastic solutions, can often get someone out of debt fast, and without long reaching impacts on their financial future. This leads me to ask, is this a case that many Australians don’t know about the other options out there?
Before choosing to declare bankruptcy there doesn’t seem to be the risk analysis about the impacts this will have on the individual. There is a lack of knowledge around the fact that declaring bankruptcy doesn’t clear all debts, and the individual is permanently affected by this single decision. For those who aren’t aware, here are the main impacts of an individual declaring bankruptcy:
- Your assets, including those you acquire or become entitled to during your bankruptcy can be sold by the trustee in order to cover your debts
- Any income you earn over a certain limit, will be taken by the trustee and used to pay off your debt
- You will be unable to work in certain professions for a period of time or be permanently suspended,
- Company Director
- Most trades
- Defence force
- Justice of the Peace
- Liquor licensor
- Travel agent
- Your name will appear on the National Personal Insolvency Index (NPII) for life
- You are unable to travel overseas unless you have permission from the trustee during your period of bankruptcy.
- You will not be released from all debts including
- Child support
- Debt secured through fraud
There are obviously some pretty big negatives to declaring bankruptcy as an individual, but what are the effects of this decision on business? I am not talking about your large corporations which can better absorb the cost of someone going bankruptcy, I am talking about the small to medium businesses (SME’s) in Australia that may be thousands of dollars out of pocket due to a client or customer going bankrupt.
There have been a number of cases where a creditor (or SME) never receives the full amount of money she/he is owed from his debtor. In some cases, SME’s may only get 10 cents to the dollar for every dollar they are owed. This is bound to have long reaching impacts for our economy. The more money SME’s lose through bankruptcy, the higher their cost of business is, and the less money they have to reinvest into their business, their employees, and our economy. In addition to this, a SME may not be able to fully absorb the cost of losing money they are owed, and may in turn put that business in financial difficulty creating a dangerous cycle.
Whilst this blog is looking much more at the impact of an individual declaring bankruptcy, and the impact this has on business, there is also the concern of other businesses going bankrupt. I know of a SME that recently had to write off close to $40,000 in unpaid bills from a single debtor. There was no chance they were going to be seeing that money again, the sheer impact this has on the SME’s bottom line was huge and continues to have an impact within their business.
Bankruptcy is seen as an easy way out of financial difficulty, but the long reaching impacts of this decision can seriously affect both an individual and a company. I believe it is time Australians had a mind shift and realise bankruptcy is not the only solution to financial hardship and should really be a last resort solution. How do we, as an industry, change this mindset for the everyday Australian?
Rasad Merchant CPA
Strategy and Business Development Manager & Secretary of the Personal Insolvency Professionals Association (PIPA)
Rasad brings over 8 years’ experience working in the insolvency sector to Debt Cutter, where he is dedicated to achieving peak business performance. With a background as both a trusted business advisor, and as a business owner, Rasad uses his foresight to strategically manage business growth and opportunities.