State of the Personal Insolvency System

Introduction

Personal insolvency plays an important role in Australia’s $3.6 trillion credit system, supporting the flow of credit in the economy by providing options for people in financial distress to have a fresh start while providing a remedy for those who are owed money. This is the third State of the Personal Insolvency System report.

This report provides an overview of the personal insolvency system that the Australian Financial Security Authority (AFSA) administers under the Bankruptcy Act 1966 (Cth) (Bankruptcy Act). We do this through administration of bankruptcies, debt agreements, personal insolvency agreements, and regulation of industry professionals (bankruptcy trustees and debt agreement administrators).

Using insights from AFSA’s Regulatory Action Statement, market surveillance and stakeholder engagements, this report provides a point-in-time analysis and short-term forecast of the personal insolvency system. Information in the report is current to 30 June 2024 and is reported in financial years.

The report focuses on 3 areas:

1. Current state of the personal insolvency system
2. Our regulatory focus
3. Our future focus

This report includes AFSA data, which is reported as at 30 June 2024. External sources, including the Australian Bureau of Statistics and the Reserve Bank of Australia, are presented as at the latest available release.

About AFSA

AFSA regulates Australia’s personal insolvency and personal property securities systems and manages the proceeds of crime. These systems play an important role in Australia’s $3.6 trillion credit system and the wider economy. They equip consumers and businesses with tools to manage financial risk, contribute to investor and business confidence and ensure access to finance within the economy.

About this report

The annual State of the Personal Insolvency System report is one of AFSA’s flagship publications, providing unique insights into developments in the personal insolvency ecosystem. The report guides our regulatory approach, including how we support people experiencing financial vulnerability and respond to system misuse. In the interests of collective stewardship and working together to strengthen the system, we share our findings with government, regulators and system participants.

For further information about this report, please contact media@afsa.gov.au.

Executive summary

AFSA expects annual personal insolvency volumes to rise over the next 2 years, as households and individuals continue to experience financial stress due to economic and cost-of-living pressures.

• In 2023–24, there were 11,644 new personal insolvencies, an increase of 17.3% from the previous year.
• Annual personal insolvency volumes are forecast to rise by (15% to 13,400 in 2024–25 and by a further 11% to around 14,950 in 2025–26).

AFSA has undertaken a series of actions to strengthen the personal insolvency system in this environment. It is reinforcing the importance of collective stewardship, where stakeholders play a role in monitoring and strengthening the system.

The proportion of debtors with less than $50,000 in liabilities has consistently represented a large part of the overall personal insolvency system.

• In 2023–24, a high proportion of debtors (49%) had less than $50,000 in liabilities, and just over a quarter (28.3%) of people had debts totalling over $100,000.

While just over a quarter (25.1%) of active personal insolvencies are business-related, they represent a much larger proportion of liabilities. Business-related personal insolvencies account for three quarters of total system debt ($13.2 billion).

The ATO is the largest creditor in the personal insolvency system with $2.5 billion in liabilities during 2023–24, including $1.7 billion for business-related and $0.8 billion for non-business-related personal insolvencies.

• The ‘Big Four’ Banks represent the next largest group of creditors with liabilities of $1.1 billion and $0.9 billion for business-related and non-business-related personal insolvencies, respectively.

Trustees hold a position of trust in our community and AFSA expects our regulatory community to act as model trustees. At the end of 2023–24, AFSA had regulatory oversight of 128 firms. Nine firms (including the Official Trustee) are responsible for administering 75% of all active personal insolvencies worth a total of $1.4 billion.

AFSA released its 2024–25 Regulatory Action Statement in August, highlighting our commitment to enforcement against harmful conduct. In 2024–25, we will focus our resources on addressing practices and advice that result in disadvantage, harm caused to individuals experiencing hardship, and fraudulent practices.

Our future focus is on positioning the agency to respond to current and future challenges to ensure we continue to deliver social and economic value for the Australian community.

1. Current state of the personal insolvency system

Since the State of the Personal Insolvency System 2022–23 report was released in December 2023, Australian households and businesses have continued to experience financial stress due to increasing cost-of-living pressures.

Difficult economic conditions and cost-of-living pressures on households and businesses have contributed to an increase in new personal insolvencies in 2023–24. Further increases in the number of personal insolvencies are anticipated over the next 2 years, albeit at a slower pace.

1.1 Personal insolvency trends

People may enter personal insolvency for many reasons, including a variety of social, health and economic factors. Personal insolvency volumes continue to be influenced by economic conditions (including unemployment, cost-of-living pressures, or low savings buffers) and changes to creditor behaviour and practices.

While personal insolvencies remain well below pre-COVID levels, they are gradually rising, with 11,644 debtors entering the personal insolvency system in 2023–24.

• This is a 17.3% increase over the 9,930 insolvencies recorded in 2022–23, yet still below the previous 5-year average of 12,564 and the previous 10-year average of 21,252.

Figure 1: Number of personal insolvencies per financial year

As shown above in Figure 1, annual personal insolvency volumes are forecast to rise by 15% to 13,400 in 2024–25 and by a further 11% to around 14,950 in 2025–26 as Australian households react to macroeconomic conditions and economic uncertainty. This forecast represents a moderate increase on current levels but is still below the 10-year average.

1.2 Market insights

The size and direction of personal insolvency volumes will be influenced by a range of factors such as economic conditions, creditor behaviour and the circumstances of individual debtors.

Since late 2022, personal insolvencies have trended up from a historically low base set during 2021-22 after the targeted response to the COVID-19 pandemic by industry and government (as shown above in Figure 1).

The growth in personal insolvencies is expected to remain moderate and decelerate over the next 12–18 months, given the stable credit risk trend in personal and home lending. However, the pace of growth may reverse back to acceleration if cost of living pressures remains elevated for a prolonged period. This would impact vulnerable households such as renters, small businesses and, to some extent, first-home buyers. According to the November 2024 monetary policy assessment by the Reserve Bank of Australia (RBA), there remain significant upside risks on inflation. Such risks make the RBA cautious with future cash rate movements, implying that the current high interest environment could persist for some time.

Economic outlook

The economic environment has been difficult in 2023–24 but is forecast to gradually improve. Meanwhile the unemployment rate is trending up from a historical low base and is anticipated to rise to 4.5% by mid-2026 (Figure 2). Many households have managed their budget well in the elevated cost of living due to unemployment levels staying low – despite the upward trend, the unemployment rate remains low compared to the pre-COVID average of 5.5%.

Figure 2: Gross domestic production and unemployment outlook

Source: RBA, ABS

Against the economic outlook, Australian households are challenged with a high cost of living environment and depleting savings buffers. This is reflected in households’ historically low consumption levels and low savings rates (Figure 3). While inflation has trended down, the pace is slower than expected. Headline inflation returned to the RBA’s target range of 2-3% in the September quarter 2024. However, the RBA forecasts underlying inflation (measured by netting off short-term price changes from headline inflation) will not return to the target range until mid-2025. This implies the cost of living could stay elevated over the next 6-9 months.

To date, most households remain financially resilient. However, an increase in unemployment in line with the above forecast (Figure 2) would put further pressure on household financial resilience and adversely affect more vulnerable cohorts such as renters with a low savings or asset base. However, a savings boost from the Government’s stage 3 tax cuts and declines in inflation may cushion the adverse impacts of rising unemployment on financially vulnerable households.

Figure 3: Household savings, consumption growth and inflation rate

Source: RBA, ABS

Financial stress – An early indicator of personal insolvencies

Household financial stress has been elevated for some time but has stabilised since the December quarter 2023. Figure 4 shows that on average households, including outright homeowners, homeowners with a mortgage and renters, spent around 87% of their disposable income on essential living items in the June 2024 quarter, a decrease from the peak of 88.2% in the September quarter 2023.

The shares of households at risk of mortgage stress (whose mortgage payment makes up between 25% and 45% of their income) and at risk of extreme mortgage stress (whose mortgage payment exceeds 45% of their income) has stabilised since December 2023. Though the default rates for mortgages and personal loans have started rising more rapidly since December 2023, they remain below COVID-19 levels and grew at a slightly slower pace in the June quarter 2024 compared to the March quarter 2024.

Figure 4: Financial stress – early indicators of personal insolvencies

Amid elevated levels of household financial stress, more severe forms of financial stress such as personal loan default and personal insolvency have been rising moderately. The pace of growth in personal insolvency is expected to stabilise in line with the broad trend in credit risk and inflation.

1.3 Regulatory insights

AFSA plays a critical role in Australia’s credit system. Across the personal insolvency system, AFSA regulated $17.3 billion in liabilities in 2023–24 owed by 40,214 individuals, of which $13.2 billion stemmed from business-related personal insolvencies.

The value of liabilities within the system is dependent on factors such as the number of people entering formal personal insolvency, the financial situation of individuals, and legislative changes affecting the personal insolvency system.

Debtors

Debtor characteristics have not changed significantly over time. In 2023–24:

• Most debtors were male (55.4%), aged between 25 and 44 (53.5%). A significant portion of debtors (21.6%) were between 45 and 64, while just 4.7% of debtors were aged 65 or over.
• New South Wales recorded the most personal insolvencies on a state-by-state basis (29.6%), followed by Queensland (25.1%) and Victoria (19.4%).
• Most debtors were from the greater Sydney metro area (17.3%) followed by greater Melbourne (13.6%).
• The top 4 industries in which debtors were employed were construction (12.2%), health care and social assistance (11.1%), other services (9.6%), and retail trade (9.5%).

The proportion of debtors with less than $50,000 in liabilities has consistently represented a large part of the overall personal insolvency system (see Figure 5 below). Due to the high proportion of debtors with low value liabilities, AFSA continues to explore ways to:

• increase access to trustworthy pre-insolvency advice to increase a debtor’s chances of managing their financial obligations and making informed decisions.
• reduce the administrative burden to promote efficiency in the system and allow debtors and creditors to swiftly return their focus to more productive economic activities.

In 2023–24, a high proportion of debtors (49.0%) had less than $50,000 in liabilities, and just over a quarter (28.3%) of people had debts totalling over $100,000. Less than 10% of people had debts of $500,000 or more.

Figure 5: Proportion of debtors with <$50,000 in liabilities

Similarly, Figure 6 below highlights that debtors entering insolvency tend to be concentrated in the cohort with a very low asset to liability ratio (less than 10% i.e. a balance sheet issue), and in the cohort with a very high asset to liability ratio (more than 100% i.e. a cashflow issue).

• As economic adversities occurred during and after the COVID-19 period (July 2022–June 2024), a higher volume of debtors with a low asset to liability ratio (less than 10%) entered insolvency compared to other cohorts.
• This cohort’s share of total new insolvencies has increased from 16% to 21% since the pandemic started.

This suggests that debtors with small savings buffers tend to be most at risk as economic conditions worsen, particularly in the current high inflationary environment.

Figure 6: Asset to liability ratio distribution over 2017-2024

Business-related personal insolvencies

Business-related personal insolvencies include insolvent individuals who have operated as sole traders, in partnerships or were directors in companies.

Figure 7 below shows that just over a quarter (25.1%) of active personal insolvencies are business-related. However, these insolvencies represent a much larger proportion of liabilities.

• Business-related personal insolvencies account for three quarters of total system debt ($13.2 billion).
• The average debt for a business-related personal insolvency is $1.3 million — over 8.8 times greater than the average debt for a non-business-related personal insolvency ($148,747).

Figure 7: Active personal insolvencies and liabilities

Practitioners

AFSA is an intelligence-led regulator. We use intelligence and data-driven insights to inform our supervisory intensity. The practices and behaviours of a small group of practitioner firms have a high impact on the personal insolvency system.

Figure 8 below illustrates our practitioner tiering framework. This reflects how system-wide influence is concentrated with a small number of firms at Tier 1, followed by Tier 2 and 3. This approach allows us to better determine the level of supervisory attention and stakeholder engagement required.

At the end of 2023–24, AFSA had regulatory oversight of 128 firms. Nine firms (including the Official Trustee) are responsible for administering 75% of all active personal insolvencies worth a total of $1.4 billion.

We expect our regulated community to act as model trustees. In consideration of the greatest potential impact on the insolvency system, the Inspector-General conducted onsite proactive inspections of all Tier 1 entities as part of the 2023–24 Inspection Program.

Inspection results, and intelligence gathered through our 2023–24 Inspection Program will inform the way we inspect Tier 1 entities in our next annual inspection program. In addition, intelligence-led risk-based assessment will identify the Tier 2 and 3 entities requiring assessment to complement the Tier 1 inspections completed in the 2024–25 program.

Figure 8: Scatter plot of firms by payment and active personal insolvencies in 2023–24

Creditors

The value of debt in the system is concentrated on a few large creditors – the Australian Tax Office (ATO) and the ‘Big Four’ Banks. This means that the recovery and collection behaviours of these few creditors have a significant impact on system outcomes.

These creditors represent a substantial portion of liabilities that are non-business-related (40.6%) compared to just 21.1% of business-related liabilities. Figure 9 highlights that the ATO is the largest creditor in the personal insolvency system with $2.5 billion in liabilities during 2023–24, including $1.7 billion for business-related and $0.8 billion for non-business-related personal insolvencies. The ‘Big Four’ Banks represent the next largest group of creditors with liabilities of $1.1 billion and $0.9 billion for business-related and non-business-related personal insolvencies, respectively.

We are engaging with these key stakeholders on how they can be model creditors, setting an example for other creditors and forming part of the collective stewardship AFSA embraces.

Figure 9: Creditors by total value of liabilities in 2023–24

Figure 10 below provides a more in-depth creditor breakdown on active personal insolvencies in 2023–24, including both business–related and non-business-related.

Figure 10: Creditor concentration of liabilities in active personal insolvencies in 2023–24

Source: AFSA

2. Our regulatory focus

AFSA is taking a more proactive education, compliance and enforcement posture to help people experiencing financial hardship and act against system misuse.

AFSA released its 2024–25 Regulatory Action Statement in August 2024, highlighting our commitment to enforcement against harmful conduct. In 2024–25, we will focus our resources on addressing conduct resulting in the areas of significant harm below:

• Practices and advice that result in disadvantage including charging excessive or unnecessary fees, delaying access to insolvency options for financial gain, and administration of debt agreements and personal insolvency agreements resulting in financial or other harm to creditors and debtors.
• Harm caused to individuals experiencing hardship including abusive financial and coercive control of individuals within domestic and family relationships through misuse of Australia’s credit system, and failure to inform debtors or options to mitigate hardship.
• Fraudulent practices including making false declarations in Statements of Affairs, and unlawfully disposing of assets.

Enduring regulatory priorities

AFSA is responsible for achieving balance in the personal insolvency system, protecting those experiencing vulnerability, ensuring compliance is the easiest option and acting decisively against those doing deliberate harm.

Most harms that undermine an effective credit system occur on the edges of our client profile where people are either experiencing vulnerability and have increased support needs or deliberately misusing the system. The bell-curve model (Figure 11) represents our approach to managing risk.

Figure 11: Conceptual model of risk concentration in the personal insolvency system

Source: AFSA

2.1 We are revising our approach to vulnerability

AFSA is building processes and stakeholder relationships to more clearly identify and respond to vulnerability.

We are currently revising our approach to vulnerability through the development of a Vulnerability Strategy which will be published in 2024–25. This is being guided by consultation and collaboration with industry and other regulators to ensure our approach is practical and fit-for-purpose.

The strategy will set out AFSA’s strategic approach to identifying and supporting people experiencing, or at risk of experiencing, vulnerability in our systems through a 3-year action plan.

AFSA is also focusing on a range of targeted activities to better support people experiencing hardship and vulnerability, such as:

• establishing a dedicated Education and Outreach function to ensure people get the right information at the right time.
• improving our Google advertising strategy so that AFSA appears prominently when people seek information about bankruptcy. This aims to target the harms caused by untrustworthy advertising regarding debt advice.
• setting up a Consumer Consultative Panel to provide advice to AFSA on people experiencing financial vulnerability.

Supporting affordable debt agreement outcomes

AFSA is dedicating additional resources to achieve affordable debt agreement outcomes for debtors.

The Official Receiver’s role is to oversee the bankruptcy process, from initial assessment to discharge. Over 2024–25, the Official Receiver aims to improve the debt agreement registration process and strengthen our engagement with administrators to achieve affordable debt agreement outcomes.

Where required, the Official Receiver may request more evidence from registered debt agreement administrators to support its decisions.

The Official Receiver will seek information about the affordability of the agreements, particularly for debtors on low incomes, and whether the proposed agreement may place the debtor in undue hardship.

We will also ask what information has been provided to the debtor about their insolvency options, as required by the legislation.

2.2 We are ensuring our systems are efficient and easy to use

The majority of debtors who enter our system sit within the middle of our bell-curve model. Our responsibility to this cohort is to make sure our systems are as easy to use as possible through simple processes and communication. This is a process of continuous improvement.

To promote system efficiency and ease of use, AFSA has reduced the number of systems debtors and other stakeholders need to navigate from 8 to 3 – with an end goal of reducing this to one system.

We have also introduced our Online Insolvency Services to enhance the user experience and allow debtors to manage their transactions in a more consolidated manner.

2.3 We are protecting the system against misuse

We are sending a clear message to all stakeholders that we will not tolerate system misuse. This means increasing our investigations capability and investing in our legal and enforcement functions to investigate allegations of wrongdoing and act where necessary.

As outlined in our 2024–25 Regulatory Action Statement, we are taking strong enforcement action against conduct that results in significant harms across the credit system. As part of this focus, we are targeting unlawful personal insolvency agreements, untrustworthy advice, and putting our regulated cohort on notice to ensure fair outcomes for debtors and creditors.

We are also making greater use of our legislative powers, including our Section 12 coercive powers to interrogate misconduct by debtors, creditors, and trustees.

Unlawful Personal Insolvency Agreements

One key focus for AFSA is unlawful Personal Insolvency Agreements (PIAs) that benefit some creditors over others. We will take court action to undo those agreements.

Recent interventions by the Inspector-General have resulted in the disruption of activity that may have involved attempts to misuse the insolvency system, to the detriment of legitimate creditors. This work involved:

• intervening at creditors’ meetings to ensure a more substantial return to creditors was obtained and voted up; and
• standing up a multidisciplinary investigation team in response to concerns that a PIA involved hiding assets to deceive creditors.

Targeting untrustworthy advice

The 3 focus areas within our 2024–25 Regulatory Action Statement identify a series of harms associated with untrustworthy advice.

Our research to date suggests that the likely scale of the problem is bigger than we expected, with the harms impacting people who can least afford the costs, delays and distress associated with untrustworthy advice. 

In 2024–25, AFSA will extend regulatory intervention in this area to its regulated cohort of Registered Trustees and Registered Debt Agreement Administrators. We will also work with peer regulators, industry, and the community to address harms caused by those entities that are not registered with AFSA.

AFSA is also developing an Untrustworthy Advice Roadmap, to be released in 2024–25.

Enforcement outcomes

AFSA is sending a clear message to all stakeholders that we will not tolerate system misuse. We have increased our investment in our legal and enforcement functions and capabilities, to investigate allegations of wrongdoing and act where necessary.

Where system misuse, harm and criminal behaviour is identified, we will investigate and take appropriate action, including referral to the Commonwealth Director of Public Prosecutions (CDPP).

For the period 2023–24, 47 people were prosecuted for a total of 85 charges. Of those charges, 60 were proven with convictions, 8 proven without convictions, and one not proven (Figure 12). Sixteen were withdrawn. The charges laid related to offences unlawfully withholding $19.8 million from the system.

Figure 12: Outcome of charges laid 2023–2

AFSA has increased our investigations capability. As shown below in Figure 13, in 2023–24 AFSA received 356 offence referrals of which 116 were accepted for investigation: 27 official cautions were issued, 3 infringement notices were issued, 13 briefs of evidence were forwarded to the CDPP, and 17 briefs accepted for prosecution by the CDPP. The remaining 56 referrals consist of investigations finalised or still under investigation.

Figure 13: Accepted referral outcomes 2023–24

3. Our future focus

AFSA is positioning itself to respond to current and future challenges to ensure we continue to deliver social and economic value for the Australian community.

Supporting the Australian Government's regulatory reform agenda

In July 2024, the Attorney-General announced proposed reforms to Australia’s bankruptcy system:

• Increasing the threshold for involuntary bankruptcies from $10,000 to $20,000 (indexed).
• Increasing the timeframe in which a debtor may respond to a bankruptcy notice from 21 days to 28 days.
• Reducing the period a discharged bankruptcy is publicly recorded on the National Personal Insolvency Index to 7 years following discharge from bankruptcy.
• Removing the proposal, or acceptance, of a debt agreement as an act of bankruptcy for the purposes of subsection 40(1) of the Bankruptcy Act.

AFSA is working closely with the Attorney-General’s Department to support the development of the proposed reforms.

The Attorney-General also announced public consultation on the proposed introduction of a Minimal Asset Procedure (MAP), which closed on 29 July 2024.

The MAP would clear a person’s debts and allow access to a fresh start sooner than bankruptcy, where that person has no other way to pay.

AFSA's forward view

Proactive stakeholder engagement

AFSA is committed to being a visible, modern, and contemporary regulator. This involves a proactive approach to engaging with our external stakeholders and our audience.

In addition to our engagement with industry and our regulated community, AFSA is taking steps to increase the frequency and value of our engagement with consumer and small business groups. This includes establishing a Consumer Consultative Panel and developing a small business strategy.

The Consumer Consultative Panel will facilitate open and consistent discussion about issues such as vulnerability with stakeholders working on the frontline with consumers, such as financial counsellors.

The small business strategy will guide AFSA’s engagement with small business representatives, including identifying industries of focus and priority activities.

Proactive, strategic stakeholder engagement will be central to our intervention against the harms caused by untrustworthy advice. AFSA will continue to collaborate with our regulatory peers, as well as with industry, financial counsellors and the community legal sector, to raise awareness across the credit system and to develop and implement regulatory responses targeting untrustworthy advice.

Regulatory stewardship

AFSA is continuing its commitment to advise the community of strategic areas of focus through our Regulatory Action Statement. This will be informed by extensive stakeholder consultation along with data and intelligence sourced both internally and externally.

We are implementing a program of process improvements, which includes improving the triage and assessment of matters and identifying efficiencies in the procedures of our regulatory functions.

We are operationalising our Regulatory Action Statement to ensure it is translated into definite actions.

We are considering replacing our Regulatory Charter with a new Compliance and Enforcement Policy, providing a clear explanation of AFSA’s powers, processes, approach to risk, and resource allocation.