Business-related bankruptcies driving steep insolvency rate increase

In the last quarter of 2012 personal insolvency increased by 1.91% on the same time in 2011, up to 7,845, according to data released yesterday by the Insolvency and Trustee Service Australia.

ITSA’s figures show more and more Australians are using debt agreements to avoid bankruptcy, with a record number of 2,410 new debt agreements recorded in the December quarter 2012.

“Debt agreements give many Australians in financial distress an alternative option to get back on their feet sooner than bankruptcy,” Attorney-General Nicola Roxon said in a statement.

The take-up in debt agreements meant the amount of bankruptcies fell to 5,259, a decrease of 5.63% on the same period the year before even though insolvencies increased.

However, of these 5,239 bankruptcies, one quarter were business related, the second highest proportion on record.

This follows the September quarter last year when a record 28.2% of bankrupts reported that their bankruptcy was business related.

The head of McCrindle Research, Mark McCrindle, told SmartCompany the figures show the “strong relationship” between insolvencies, bankruptcies and small business.

“I think it just shows the ongoing entrenchment of the financial challenges that the global financial crisis has brought about,” he says.

McCrindle says there has been a domino effect apparent in the impact of financial problems in business and society.

“The first to be exposed are those that are hit from an expenses perspective, then those challenged on income then it flows through to business and particularly small business,” he says.

“Now, five years on, it is really hitting small business and those who managed to survive the buffeting for a few years are succumbing.”

McCrindle says a useful bellwether is data published by the Australian Bureau of Statistics on entries and exits, which show one in five business sought loan or equity in the last year and for three out of  four the reason for that money was business survival and to boost short-term cashflow rather than to expand the business or to grow.

“These figures show it is just a challenging environment for business right now,” he says.