Rise in unemployment likely to lift insolvencies

 If Australia’s unemployment rate keeps rising, it could trigger more personal insolvencies, writes Stewart Free.

Australia’s current unemployment rate of 4.2 per cent is expected to increase over the next couple of years, potentially to 4.6 per cent by 2026. If this happens, personal insolvency levels are sure to follow.

They’re already rising. The latest AFSA statistics show in July this year, 1157 people entered into a formal personal insolvency, including 632 bankruptcies. This compares to 851 in June 2024. The June 2024 quarter saw personal insolvency numbers at 2947 – an 8.9% increase on the June 2023 quarter.

What’s driving the rise in personal insolvencies?

There are three key types of financial pressures driving the increase: levels of tax debt, the inability to raise finance, and interestingly, strata debt. The levels of tax debt are being attributed to the increasing number of Director Penalty Notices (DPNs) issued by the Tax Office. After a lull during Covid, the ATO is now clawing back the money it’s owed and these penalty notices are catching up with company directors, causing a rise in business-related personal insolvencies. In July, there were 315 of these types of insolvencies.

We’re also seeing business owners and individuals running out of ways to pay their debts – a situation that’s feeding into ballooning credit card debt as people exhaust all other financing options to cover business and daily living expenses. Another debt that is getting out of control is strata debt. More people are falling behind in their levies, causing many to enter bankruptcy.

I am worried about this spike in insolvencies as we head towards the Christmas period. Christmas is a time when people feel pressured to spend more on gifts and food. This, coming at a time of higher costs of living, means credit cards and “buy now, pay later” schemes will be relied upon, potentially leading to financial stress down the line.

Cost of living eats into savings

AFSA has also warned that personal insolvencies are likely to rise as more people dip into their savings to pay for daily living expenses or to deal with their debts, a situation that will worsen if unemployment keeps rising. Currently, if you have a job, you are at least earning money to help pay for your expenses. But if you lose your job, those savings are going to fast disappear. One of the main groups affected is likely to be renters. Over the past few years, AFSA found those renters with unsecured debt, and who have been affected by above-inflation price rises, comprise nine in 10 personal insolvencies – despite making up just 21 per cent of the population.

AFSA expects personal insolvency numbers to rise to nearly 15,000 this year, a more than 20 per cent increase on last year. If unemployment levels rise further, this number will also increase.

It’s important if you’re facing a financial challenge to seek help early from a trusted accountant or financial adviser. Early advice will lead to a better outcome for your situation. Insolvency is not the only solution; there is a range available, such as Personal Insolvency Agreements, and that’s why it makes sense to get help as soon as you know you’re struggling.

Stewart Free
Partner | Bankruptcy Trustee
Jirsch Sutherland