Personal insolvencies down but statistics hide the real issues, expert suggests

Personal insolvencies dropped 8.7% in the September quarter compared to 2012, but the figure doesn’t reveal the true picture of the economic battles being fought, an expert suggests.

Late last week the Australian Financial Security Authority (ASFA) chief executive Veronique Ingram released the provisional personal insolvency activity statistics for the September quarter 2013.

The figures showed that personal insolvency activity nationally fell 8.7% in the September quarter this year, compared to the September quarter for 2012.

All states and territories except for Western Australia recorded a decrease.

In the quarter, 24.1% of bankruptcies were business related, while 9.1% of debt agreement debtors were business related.

Of those entering personal insolvency agreements in the quarter, 31.1% were business related.

Despite the decline in personal insolvencies, Pitcher Partners partner Andrew Yeo warns that this is not an indication of economic improvement.

He told SmartCompany this morning that a change in fee structure for people or companies filing bankruptcy against an individual rose 30% in in June 2012. He says it could cost a business at least $3000 in fees to file against someone, or an individual around $1500.

“In some instances, this has dissuaded creditors from pursuing debtors to bankruptcy.”

Add to this lawyer fees and the cost is beyond what many can afford.

“It is very expensive to bankrupt someone,” he says.

Yeo explains that the statistics for the September quarter 2012 would have been largely made up of people filing at the lower fee rate.

Another reason for the decline could be the delay in bankruptcies of individuals due to the relatively low interest rates and low unemployment figures. Yeo explains that these two factors mean debtors are inclined to hold on as long as possible before conceding that they can pay.

“Most debtors will do everything possible, and hold out as long as possible in order to avoid bankruptcy, in the hope that circumstances may change,” he says.

A hike in interest rates, or losing their job could push them to act.

Yeo says a third aspect, and a sleeping giant, is the recently implemented Directors Penalty notices, which he thinks will lead to an increase in bankruptcy rates.

“Recent amendments to the tax legislation have meant that a significantly increasing number of company directors will find themselves personally liable for certain company tax obligations,” he says.

“These amendments became effective from 30 June 2012.  While a large number of bankruptcies are certain to eventuate as a result of these amendments, the ATO has not yet commenced the full process of pursuing them.

“This will certainly occur in the future as the ATO receives further funding for these recovery processes,” he says.