How to beat Covid bankruptcy blues as personal debts rise

Personal insolvency numbers are starting to climb and the trend is expected to accelerate, but people can prevent bankruptcy.

Anthony KeanePersonal finance writer

@keanemoney

3 min read

August 19, 2021 - 7:27PM

The Australian Business Network

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Personal bankruptcy rates are rising, and worse is expected to come as Covid lockdowns strangle household and small business incomes.

Figures from the Australian Financial Security Authority show personal insolvencies have been climbing since December, but debt specialists say there are several ways to stop yourself sliding into debt oblivion.

June quarter personal insolvencies totalled 2682, which is well below the quarterly average of 6000-8000 pre-pandemic and reflects the financial leniency still being shown by banks and the Australian Taxation Office.

However, that won’t last forever, says Oracle Insolvency founding partner Yulia Petrenko, so people with dangerous personal debts should get on the front foot.

“In our experience there was also a lot of goodwill from creditors when Covid first hit, namely because they themselves were being supported by government relief measures,” Petrenko says.

Oracle Insolvency Services partner Yulia Petrenko says people’s debts won’t disappear.

“However, these debts won’t disappear, the time is coming when creditors will want to see payment,” she says.

JobKeeper is gone, rent relief is patchy depending on the landlord, and temporary bankruptcy protection measures introduced in 2020 ended in March.

Petrenko says borrowers who want to avoid bankruptcy should get on the front foot quickly and seek professional advice before it’s too late.

“Creditors often move to take action against someone who owes them money because their calls are going unanswered,” she says.

“Find out what financial assistance you may be entitled to. Banks have loan deferrals for borrowers in financial hardship and there are government cash grants.

“Be wary of borrowing money to get out of trouble because if it’s a short-term loan the penalties for missing a payment can be very high.”

About one quarter of personal insolvencies are sole traders and other business owners, and they are being urged to look at ways to cut costs and investigate what cash grants they are eligible for amid the fresh lockdowns sweeping across Australia.

CreditorWatch CEO Patrick Coghlan says both the ATO and banks are showing leniency to small business owners “and we’re also seeing many suppliers go easy on debtors”.

“On top of that, many businesses are just sitting in a holding pattern at the moment,” he says.

Hall Chadwick bankruptcy trustee John Shanahan says people trying to recover from debts should think hard about their choices.

“Yes, you can borrow money from your family to avoid going bankrupt but is it going to solve the problem?” he says.

“Get some financial advice and think carefully whether it is worthwhile borrowing money from Peter to pay Paul or whether that is just delaying the inevitable.

“Bankruptcy can be the reset that helps people get their life back in order and should not necessarily be viewed as all doom and gloom.”

Tax debts are stressful for many small business owners, and Shanahan suggests speaking with the ATO.

“Depending on your circumstances, the ATO may be able to give you extra time to lodge and pay your tax, set up a payment plan tailored to your situation, remit penalties or interest, process your tax return as a priority, prevent any tax refund you may be due to receive from being used to pay debts with other government organisations, and defer your tax lodgement and payment due dates,” he says.

Petrenko is seeing an increase in personal bankruptcy, particularly among small business owners in the service industries.

“There are people who rely on personal contact to conduct their business, such as hairdressers and beauticians, in addition to people affected by the general activity slowdown such as building subcontractors,” she says.

“The worst thing an individual in financial trouble can do is bury their head in the sand – there is help available.”