State of the Personal Insolvency System Report

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Introduction

Personal insolvency plays an important role in Australia’s $3.5 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. AFSA released the first State of the Personal Insolvency System report in February 2023.

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 compliance program, market surveillance and stakeholder engagements, this report provides a point in time analysis and short-term forecast of the personal insolvency system. Information contained in the report is current to 31 August 2023 and is reported in financial years.

This report focuses on 2 areas:

1.
Current state of the personal insolvency system

2.

Our regulatory focus

This report includes AFSA data, which is reported as at 31 August 2023. External sources, including the Australian Bureau of Statistics and the Reserve Bank of Australia, are presented as at the latest available release.

People experiencing financial stress are encouraged to seek support early. Free confidential assistance is available through the National Debt Helpline.

Executive Summary

AFSA is expecting annual personal insolvency volumes to rise over the next two years as households and individuals experience greater levels of financial stress due to economic and cost of living pressures.

  • Personal insolvency volumes remained at historically low levels in the last financial year (9,930 in 2022–23).
  • However, these volumes are expected to rise by 23% in 2023-24 to around 12, 250 and by a further 20% in 2024-25 to around 14,750.

During the COVID-19 and post-COVID periods, AFSA saw a higher share of debtors with very small savings buffers entering into insolvency compared to other cohorts — increasing 5 percentage points from the pre-COVID average of 16%, to 21%.

Around 32%, or $4.6 billion, of the value of debt in the personal insolvency system is concentrated on the 5 largest creditors — the Australian Taxation Office and the ‘big 4’ banks. At present, creditors are continuing to offer hardship provisions to debtors, which may delay or prevent people from entering the personal insolvency system.

AFSA is expanding its engagement with creditors outside of the ATO and the ‘big 4’ banks, to ensure we take a collective view of the system and capture emerging trends that could impact the performance of the credit system.

In September 2023 we released our Regulatory Strategy 2023–27 and our Regulatory Action Statement 2023–24. Together, these documents set out our approach and signal our regulatory focus for the year ahead. We focus on addressing enduring regulatory priorities of system: vulnerability, system efficiency and system misuse through our regulatory stewardship.

In October 2023, the AFSA Inaugural Summit brought together more than 100 leaders, delegates and stakeholders across industry and government to discuss key issues in maintaining a strong credit system for Australia.

AFSA takes misuse of the personal insolvency system seriously, ensuring the public is protected and confidence in the credit system is maintained. Our future focus includes increasing our regulatory supervision, being constructively tough, and administering stronger enforcement outcomes. In 2022–23, 91 persons were referred for prosecution by AFSA for a total of 174 charges.

An image summarising the four key points discussed in the executive summary

1. Current state of the personal insolvency system

Since the last State of the Personal Insolvency System (January 2023) report, Australian households and businesses have been experiencing increased levels of financial stress. It is likely that there will be economic headwinds for some time to come.

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 hit a historical low during 2021–22 after the targeted response to the COVID-19 pandemic by industry and government. Personal insolvencies have remained low, with 9,930 individuals entering the personal insolvency system in 2022–23 (Figure 1).
 

Figure 1: Total personal insolvencies by financial year

Figure 1: Total personal insolvencies by financial year

Source: AFSA

Annual personal insolvency volumes are expected to rise to around 14,750 in 2024–25 as households react to macroeconomic factors impacting the credit system and the heightened economic uncertainty. While this would be a substantial increase on current levels, it is still below the long-term average of 23,100.

Factors observed below in market insights will impact the size and direction of personal insolvency activity movements.

1.2 Market insights

The economic landscape continues to evolve, with challenging conditions anticipated for years to come. As part of our commitment to credit system stewardship, we use our stakeholder engagement program to seek information to support our insights.

Economic outlook

The economic environment has been weak and is forecast to worsen, characterised by slow economic growth and rising unemployment from a historically low base (Figure 2). Individuals may find it easier to meet increasing living costs while they remain employed; however, as unemployment rises financial resilience may change.
 

Figure 2: Gross domestic production and unemployment outlook

Figure 2: Gross domestic production and unemployment outlook

Source: RBA

Against the economic outlook, households are challenged with high costs of living and depleting saving buffers. Inflation has been trending down, but the Reserve Bank of Australia (RBA) anticipates it will not be back to a normal range until 2025, implying costs of living will remain elevated going forward. The current savings ratio has become lower than the pre-COVID-19 average (Figure 3). Consumer confidence is low, reflected in constrained consumption growth over recent periods.
 

Figure 3: Household savings, consumption growth and inflation rate

Figure 3: Household savings, consumption growth and inflation rate

Source: RBA, ABS

Households have been under intensified financial stress in recent periods, with the highest mortgage stress and highest cashflow constraints since the GFC. All households, including both mortgage holders and renters, now spend more than 86% of their disposable income on necessary living items (Figure 4).
 

Figure 4: Financial stress – early indicators of personal insolvencies

Figure 4: Financial stress – early indicators of personal insolvencies

Source: ABS

From January to August 2023 enquiries to the National Debt Helpline (NDH), a free financial counselling helpline, have increased by close to 40% compared to the same period last year.
The NDH website searches reveal that the top debt problems include utilities, taxation and/or Centrelink debts, rent, and credit rating repairs, indicating that acute financial distress is concentrated in ongoing living costs. Their data also shows that mortgage related issues started to become more prominent over June to August 2023 as a large volume of low fixed rate mortgages rolled into high variable rate mortgages in the first half of 2023.

Despite intensified financial stress, credit risk reported by lending institutions points to low levels of past due debts in recent periods. There are several factors which explain this:

  • historically low unemployment
  • unprecedentedly high household savings buffers accumulated during the COVID-19 pandemic having been used to relieve finance constraints
  • redraw facilities available against advance mortgage payments
  • decreases in consumption to avoid defaulting on major loans.

Current low credit risk level is consistent with trends in personal insolvencies. However, prolonged financial stress and worsening economic conditions could exhaust the accumulated saving base going forward, contributing to a higher loan default rate. This is reflected in the forecast of personal insolvency volumes for the next two financial years.

1.3 Regulatory insights

Across the personal insolvency system, AFSA regulated $14.3 billion in liabilities in 2022–23 owed by over 44,000 individuals, including $9.6 billion in liabilities for business-related personal insolvencies. The value of liabilities within the system is dependent on a number of factors such as the number of people entering into 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. Most people who entered personal insolvency during 2022–23:

  • were between 25 and 44 years old (54.2%)
  • were from greater Sydney (17.1%), rest of Queensland (14.5%), and greater Brisbane (12.6%), greater Melbourne (12%), rest of New South Wales (12%)
  • worked in construction (12.1%), healthcare and social assistance (11%), retail trade (9.5%), other services (9.8%), transport, postal and warehousing (8.7%).

The proportion of debtors with less than $50,000 in liabilities has consistently represented a large part of the overall personal insolvency system (Figure 5). Since the COVID-19 pandemic the proportion has subsequently increased, reaching 52.7% in 2022–23.

Consistent with the levels observed in the State of Personal Insolvency Report (January 2023):

  • most people (52.7%) had less than $50,000 in liabilities
  • a quarter (26.3%) 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 less than $50,000 in liabilities

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

Source: AFSA

Due to the high proportion of debtors with low value liabilities, AFSA continues to explore ways to:

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

Figure 6 highlights debtors entering insolvency tend to be concentrated in the cohort with very low asset to liability ratio (less than 10%) and in the cohort with very high asset to liability ratio (more than 100%).

Notably, as economic adversities occurred during the COVID-19 period and thereafter (July 2022–June 2023), a higher volume of debtors with low asset to liability ratio (less than 10%) have 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 saving buffers tend to be most at risk as the economic condition worsens, particularly in the current high inflationary environment. This trend is consistent with recent reports by the major banks and other financial institutions, that young households who are renters with small saving buffers have been most adversely affected by economic challenges (including rising costs of living) compared to other demographic groups.
 

Figure 6: Asset to liability ratio distribution over 2017-2023

Figure 6: Asset to liability ratio distribution over 2017-2023

Source: AFSA

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 shows that nearly a quarter (23.8%) of active personal insolvencies are business-related; however, these insolvencies represent a much larger proportion of liabilities.

Business-related personal insolvencies contribute over two-thirds of total system debt ($9.6 billion). The average debt for a business-related personal insolvency is $905,708 — over 6.6 times greater than the average debt for a non-business-related personal insolvency ($136,926).
 

Figure 7: Distribution of debtor liabilities by business-related personal insolvencies

Figure 7: Distribution of debtor liabilities by business-related personal insolvencies

Source: AFSA

Historically, there has been a strong correlation between corporate insolvencies and business-related personal insolvencies (0.8), and between corporate insolvencies and non-business-related personal insolvencies (0.7). Corporate insolvencies have historically seen increases/decreases in volumes between 9 to 12 months ahead of increases/decreases in non-business-related personal insolvencies.

In the past financial year, corporate insolvencies (including administrations, restructuring and liquidation) have increased by 62% from 4,912 cases in 2021–22 to 7,942 cases in 2022–23. These volumes exceed the pre-COVID-19 average by 3%. Compared to corporate insolvencies, personal insolvencies (including business-related) have risen more slowly over the same period and have not yet trended back to the pre-COVID-19 average.

Risks and options for small business and sole traders

Faster increases in corporate insolvencies have highlighted the different risks and options for small businesses and sole traders. Some people who operate small businesses or are sole traders can be personally liable for debts incurred and may appear in the corporate or personal insolvency systems. For those who are personally liable, bankruptcy through the personal insolvency system may be the most suitable option.

Due to the high average amount of liabilities for business-related personal insolvencies, and correlations with the corporate insolvency system, AFSA continues to explore ways to work with co-regulators to provide consistent and streamlined advice for people who may enter the insolvency system through different channels.

Practitioners

AFSA is a risk-based regulator, and we use intelligence and data-driven insights to inform our supervisory intensity. The practices and behaviours of a small group of practitioner firms (firms) have a high impact on the personal insolvency system. To reflect the way that risks are distributed across the personal insolvency system, AFSA uses a harms-based approach that best considers how system-wide influence is concentrated with a small number of firms. As part of this approach, we have classified firms into tiers to allow us to better determine the level of supervisory attention and stakeholder engagement required.

We are also taking a more holistic approach to practitioner surveillance, by moving the focus of our regulatory approach from individual practitioners to firms. This will ensure our efforts and resources are targeted on those firms that have the biggest impact on our system.

We consider several risk factors that may impact system outcomes when classifying firms into one of 3 tiers. Factors include a firm's caseload (volume of active personal insolvencies being managed), value of total caseload (value of debt managed) and their performance record. The concentration of firms in the system is highlighted in Figure 8.

At the end of 2022–23 AFSA had regulatory oversight of 144 firms. 9 firms (including the Official Trustee) are responsible for administering 80% of all active personal insolvencies.
 

Figure 8: Firm concentration by active personal insolvencies in 2022–23

Figure 8: Firm concentration by active personal insolvencies in 2022–23

Source: AFSA

Note: The axes are represented on a log10 scale. Each tick on the chart axes is 10x larger than the previous tick. Data is presented on this scale to better represent the spread of payments (y-axis) and number of active personal insolvencies (x-axis).
 

Creditors

The value of debt in the system is concentrated on a few large creditors, with the Australian Taxation Office and the ‘big 4’ banks collectively owed $2.8 billion in business-related and $1.8 billion in non-business-related personal insolvencies (Figure 9). This means that the recovery and collection behaviours by these few creditors have a significant impact on system outcomes.
 

Figure 9: Creditor concentration in active personal insolvencies in 2022–23

Figure 9: Creditor concentration in active personal insolvencies in 2022–23

Source: AFSA

Note: The ‘big 4’ banks are the Commonwealth Bank of Australia, National Australia Bank Limited, Westpac Banking Corporation and Australia and New Zealand Banking Group Limited.

The Australian Taxation Office (ATO) is the largest creditor in the personal insolvency system with $2.0 billion in liabilities during 2022–23. The ATO has recommenced debt recovery action which had been paused during the COVID-19 pandemic, this means that there may be a higher volume of personal insolvencies driven by ATO debt recovery actions in the short to mid-term and could increase the proportion of debts owed to the ATO.

Other creditors are continuing to offer hardship provisions to debtors, which may delay or prevent people from entering the personal insolvency system.

We are expanding our stakeholder engagement to include creditors outside of the ATO and the ‘big 4’ banks, to ensure we take a collective view of the system and capture emerging trends that could impact the performance of the credit system.

Activities that affect our operating environment

Several key activities or events have occurred in recent months:

  • In March 2023, AFSA hosted a national Personal Insolvency Roundtable on behalf of the Attorney-General, the Hon Mark Dreyfus KC MP, inviting key stakeholders across all sectors of the personal insolvency system to better understand the pressure points and potential key areas for reform.
  • In July 2023, the Parliamentary Joint Commission on Corporations and Financial Services released its report on Corporate Insolvency in Australia. The report includes findings which affect the personal insolvency system, and AFSA continues to monitor outcomes from this process to identify opportunities to progress priorities for action or change.
  • On 1 September 2023, the Attorney-General’s Department published a discussion paper outlining proposals to several targeted short-term personal insolvency reform opportunities, targeting several of the issues raised at the Roundtable. Proposals include:
    • increasing the bankruptcy threshold value from $10,000 to $20,000
    • increasing the period for a debtor to respond to a bankruptcy notice from 21 days to 28 days
    • reducing the permanent record on the National Personal Insolvency Index to 7 years
    • amending the Bankruptcy Act so that entering into a debt agreement is no longer considered an ‘act of bankruptcy’ and remains accessible to vulnerable users.

Capital Gains Tax

The treatment of Capital Gains Tax (CGT) in bankruptcy has increased the complexity, and decreased timeliness of the realisation and disbursement of assets. In June 2021 the Australian Taxation Office (ATO) issued a direction that trustees in bankruptcy are required to lodge tax returns and remit CGT on asset sales that attract a capital gain. AFSA and its regulated community have identified that this has affected estate administration in several ways:

  • CGT trust tax returns must be lodged by paper which can take months to be approved
  • the trustee may need to apply for a Tax File Number on behalf of the estate in order to lodge the tax return, also increasing duration
  • the CGT calculations may require estimations to calculate the amount of tax due
  • registered trustees may be personally liable for payments if an adverse finding is made by the ATO after the bankrupt estate is disbursed to creditors.

AFSA has published the Inspector-General Practice Guideline (3) to assist bankruptcy trustees to comply with the ATO’s direction. We are also looking at how internal processes can be streamlined to increase system efficiencies.

2. Our regulatory focus

AFSA considers the needs of individuals with unmanageable debt alongside the need to provide recourse for those who are owed money, and the effect this has on the credit system and broader community. We continually survey the credit system and act when we identify system vulnerabilities, inefficiencies, or misuse.

2.1 Opportunities within our regulatory remit

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 10) represents our approach to managing risk. This model highlights how risks are disproportionately spread across 3 groups in the personal insolvency system.
 

Figure 10: Conceptual model of risk concentration in the personal insolvency system

Figure 10: Conceptual model of risk concentration in the personal insolvency system

Source: AFSA
 

  • System vulnerability: we support individuals most at risk of unintentional noncompliance and exploitation by unscrupulous agents in the system.
  • System efficiency: we provide people who enter the personal insolvency system with access to effective systems and processes.
  • System misuse: we drive willing compliance and engagement and address intentional misuse using innovative and collaborative regulatory practices.

AFSA’s Regulatory Review

In September 2023, AFSA commenced a Regulatory Review to conduct a forward-looking examination of our regulatory posture, toolkit, and infrastructure.

The Regulatory Review will assist us to maximise our ability to steward our regulatory systems, including the personal insolvency system, and ensure that we are best placed to respond to vulnerabilities, inefficiencies, or misuse.

Regulatory Strategy and Annual Regulatory Statement

In September 2023 we released our Regulatory Strategy 2023–27 (the strategy) and our Regulatory Action Statement 2023–24 (the statement). The strategy links our operations to our strategic direction — supporting a strong credit system for Australia by being a visible, modern, and contemporary regulator. It articulates our approach to regulatory stewardship and assists us to:

  • demonstrate a strong and balanced regulatory posture
  • adopt a collaborative, whole-of-system, and intelligence-based approach to regulation.

The strategy covers a four-year period and provides the regulatory principles and foundations to guide our work. Supporting the strategy is our Regulatory Action Statement (the statement). The statement outlines how we are operationalising the Regulatory Strategy and identifies our key regulatory harms and the activities we are undertaking to mitigate or respond to those harms. The statement identifies the key focus areas for the next 12 months within system vulnerability, system efficiency and system misuse. 

AFSA Inaugural Summit

In October 2023, AFSA held its Inaugural Summit centred on building confidence through connection. The Summit brought together more than 100 leaders, delegates and stakeholders across industry and government to discuss key issues in maintaining a strong credit system for Australia. Key discussions included:

  • untrustworthy advisors and unlicensed parties who operate on the fringes of the system and targeting vulnerable people
  • designing systems to ensure compliance in a way that puts the user experience first
  • building financial security through financial capability and practical ways we can support the Australian community.

AFSA looks forward to building on these conversations as we continue expand our stakeholder engagement and drive regulatory stewardship across the system.

Enforcement outcomes

AFSA takes misuse of the personal insolvency system seriously. Those who commit financial crimes are brought to account to ensure the public is protected and confidence in Australia’s credit system is maintained.

In 2022–23 AFSA received 355 tip-offs. During the same period, 91 persons were referred for prosecution by AFSA for a total of 174 charges. As outlined in Figure 11 below, 117 of these charges (or around 67%) were proven with conviction (104) or without conviction (13).
 

Figure 11: Results of charges for offences against the Bankruptcy Act and Criminal Code Act 1995 in 2022–23

Figure 11: Results of charges for offences against the Bankruptcy Act and Criminal Code Act 1995 in 2022–23

Source: AFSA

Our enforcement approach is aligned with the agency’s ambition to be a visible, modern, and contemporary regulator. For AFSA, success is:

  • ensuring we take a contemporary approach to enforcement by using a range of options to ‘enforce and protect’ e.g., considering the use of in-house prosecutions
  • ensuring we ‘deter and correct’ by making our enforcement actions visible through media releases highlighting successful enforcement outcomes
  • co-regulating with other agencies to identify and address misuse within, and external to, our regulatory perimeter
  • providing modern regulatory services and creating an open and approachable environment for anyone in our regulatory ecosystem to report allegations of misconduct.

To achieve our vision of a strong credit system for Australia we are increasing our regulatory supervision, being constructively tough, and administering stronger enforcement outcomes. This work will be supported through amplifying our use of data and strengthening our partnerships with co-regulators to prevent future system misuse.

AFSA’s unapologetic and firm stance on those that seek to misuse the system is demonstrated by the following two examples of enforcement outcomes achieved this year:

2.2 Broader opportunities

Not all issues we identify are within our regulatory remit. We recognise opportunities for reform and use our expertise and networks to inform solutions that will maximise our ability to steward our regulatory systems, including the personal insolvency system.

AFSA must therefore be a proactive and trusted voice to contribute to and shape discussions, and respond to, changes in our regulatory system. We are continuing to support the Attorney-General’s Department to explore priority legislative reform issues by providing insights and expertise.

In July 2023, the Parliamentary Joint Committee on Corporations and Financial Services released its report on Corporate Insolvency in Australia. The Committee’s key finding was that there is a need for an independent and comprehensive review of the insolvency system, including both corporate and personal insolvency.

AFSA will continue to work in partnership with similar regulatory agencies as well as other government and non-government stakeholders to:

  • proactively communicate and share information
  • identify problems outside of our regulatory perimeter that are causing harm
  • establish joint taskforces to target those who may cause harm to the personal insolvency system.

Previous State of the Personal Insolvency System Reports