Warning cost of living and interest rate rises will have ‘catastrophic’ impact

Super-sized interest rate rises, huge jumps in the price of groceries alongside company collapses, spell bad news for Aussies.

The skyrocketing cost of living, rising interest rates, a blowout in debt and company collapses are going to combine to have a “catastrophic effect” with more Aussies likely to face losing their homes and falling into bankruptcy in coming months, an expert has warned.

Malcolm Howell, partner at insolvency specialist firm Jirsch Sutherland, said there had already been a rise in personal bankruptcies but predicted a “significant increase” in the next 18 months as families come under pressure from soaring costs.

He said the surging prices for groceries, power, gas and petrol as well as mortgage repayments would all place pressure on Australians, particularly those with young kids.

“Those little bits of pieces all join together to create quite a big problem for many people who live day to day, don’t have extra cash, have a young family and are paying school fees and trying to make sure the kids are looked after and maybe the husband or wife doesn’t work at the time,” he told news.com.au.

“General day to day costs are being driven up and people are not getting government subsidies that were available during the pandemic so you are on your own and have to try and budget and it’s very difficult.

“All those things combined will have a big impact on families or a mum and dad who are running a business. At the moment it’s really difficult and we getting more and more inquiries from people that have smaller businesses that are finding it difficult to meet the terms of their contract as can’t they get supply or labour.”

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Malcolm Howell, Jirsch Sutherland partner. Picture: Supplied

It comes as Australia recorded 3917 liquidations or administration appointments for businesses across all industries during the 2021-22 financial year, which will have a flow on effect to individuals.

After corporate failures, there’s generally an increase in personal insolvencies as many business owners are personally liable for outstanding debts, Mr Howell explained.

Initially however, there’s likely to be an increase in small end bankruptcies as a result of credit card or buy now, pay later debt as people struggle with cost of living pressures, he said.

“If we see the increase in interest rates go up too much further that will put the pinch on a lot of families. The youngsters have got to have everything now, so they’ve got loans all over the joint and just buy for now,” he said.

“They don’t think I have a $600,000 mortgage so do I really need a new TV in every room? Those buy now, pay later those schemes they are fraught with risk for just a small amount of consumer credit.”

Rising interest rates could contribute to people facing bankruptcy. Picture: William West / AFP

But Australians are also at risk of losing their family home although Mr Howell acknowledged that “banks are scared to pull the trigger” and will do everything in their power to prevent people defaulting.

“We speak to (bank) credit managers regularly and those are the ones that make the decisions on how to extend credit and what to do if people are going to default and they are all telling me at the moment the defaults are increasing and that’s going to have a catastrophic effect,” he said.

But other bankruptcies will be brought on by company collapses where the owner has dipped into their own savings to prop it up as well as making personal guarantees over the business debts, which also means those family homes are also at risk, Mr Howell said.

He said there are estimates that 24 per cent personal insolvencies are created as a result of failed companies, but he thinks the figure is even higher.

“If a husband or wife runs the business and it fails, the family home is at risk because it’s been viewed as collateral security against business loans,” he said.

“It all sounds good at the time but when it hits the fan, it means that property is at risk, so in all business situations we find the structure at the outset is critical and getting proper advice from the accountant.”

Personal insolvencies as a result of construction collapses are expected. Picture: iStock

It’s no secret the construction industry is in crisis, with scores of big-name firms collapsing in recent months, with 28 per cent of insolvencies in the last financial year linked to the sector. Mr Howell said personal insolvencies could be particularly prominent in this industry as builders grapple with profits being eaten away amid fixed price contracts, soaring material prices and a shortage of labour.

“(Builders) personal assets are at risk. They will go bankrupt and the trustee will go right through their estate looking for where the money has gone and what money they had invested in property and it will be (sold) and used to pay the debts of the company because they have personal guarantees,” he said.

“There’s also the tax debts … so they end up with a huge list of creditors in their personal estate.

“It’s a very unfortunate situation as a lot of theses builders take the risk doing what they do and unfortunately economic circumstances is what is causing this – it’s not your usual greed – which is often seen in a usual liquidation and bankruptcy scenario.”

The ATO will begin to ramp up their debt collecting in coming months too, warned Mr Howell. Picture: Getty Images

Recovery action from the Australian Taxation Office will also lead to claims against directors, Mr Howell warned.

“The extent of director’s personal guarantees for company debts always comes as a surprise to directors who often have no idea what they’ve previously signed,” he added.

“This can be exacerbated by an over-expectation about what financed assets are worth versus the resultant shortfall.”

Mr Howell added that Australians shouldn’t put their head in the sand and instead seek out help early to give them more options if facing financial difficulties.

Originally published as Warning cost of living and interest rate rises will have ‘catastrophic’ impact