26 September 2023

AFSA preparing for personal insolvencies

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Rising costs of living and wider economic uncertainty are expected to push personal insolvencies towards pre-pandemic highs, according to a new report from the Australian Financial Security Authority (AFSA).

Personal insolvency is a legal alternative to declaring bankruptcy, allowing people in financial distress to come to an arrangement to settle their debts without becoming bankrupt.

Chief Executive of AFSA, Tim Beresford said the State of the Personal Insolvency System report showed personal insolvency volumes were at historical lows in 2021-22, with just 9,545 personal insolvencies recorded – well below half the 10-year average of 25,300 insolvencies annually.

However, Mr Beresford said this was expected to revert towards levels observed in 2019 over the next two financial years.

He said factors including debt agreement reforms and the economic response to the COVID-19 pandemic stimulus had influenced falling insolvencies since the last peak in 2017-18.

“Australian households are currently experiencing financial stress,” Mr Beresford said.

“Unemployment remains low but the risk of insolvency is rising as household saving buffers decline and cost of living pressures increase,” he said.

“Other adverse macroeconomic factors such as rising interest rates, high inflation, ongoing supply chain pressures and rising energy prices will put those vulnerable under more financial stress.”

Mr Beresford said AFSA supported the flow of Australia’s $3.5 trillion credit system by allowing people in financial distress to get a fresh start, while providing a remedy for those who were owed money.

He said most people who entered personal insolvency during 2021-22 had low levels of debt, with 52.7 per cent of insolvencies in the last financial year involving less than $50,000 in liabilities.

Mr Beresford said AFSA was anticipating that more people would experience an increase in their mortgage and loan repayments as a number of fixed-interest periods came to an end in March–July 2023.

“The number of people calling debt helplines to talk through options for credit card and mortgage repayments has moderately increased,” the CEO said.

“Uptake of informal insolvency arrangements has increased (from a low base).”

Mr Beresford said AFSA was concerned about the impact of untrustworthy advisers who operated outside current legislative boundaries and contributed to system misuse.

He said the Agency remained vigilant through its compliance program, “using our education and outreach programs to inform debtors, creditors, practitioners and other Government Agencies when we identify issues outside our regulatory remit.”

AFSA’s five-page Report can be accessed at this PS News link.

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