Young renters to bear the brunt of personal insolvency surge

“They are just starting off and actually have no assets and only cash. If they lose the cash, or the rent goes up substantially, it puts them in a really precarious position quite quickly, with a couple of credit card debts, a personal loan, and maybe a couple buy now, pay laters.”

More than 52 per cent of people entering bankruptcy did so with debts less than $50,000, and half of those have less than $10,000 in assets.

As of June 2023, all households, including both mortgage holders and renters, were spending 86 per cent of their disposable income on necessary living items, the report found.

“When you look at the aggregate numbers, which clearly the [Reserve Bank] looks at, the buffers are still quite strong,” Mr Beresford said. “But ... there’s actually quite a distribution, there’s a number of people with actually quite healthy asset to liability ratios.

“But at the other end of the distribution, there’s some people who are very vulnerable.”

The Australian Taxation Office was the biggest single creditor in the personal insolvency system in 2022-23, with $2 billion owed. The big four banks held collective debts of people in insolvency of $2.6 billion, and a further $9.7 billion was held by all other creditors.

Business-related personal insolvency made up $9.6 billion of $14.3 billion in liabilities owed by people in insolvency in 2022-23.

Following a period of leniency during the pandemic, the ATO has been pursuing tax debts more aggressively. Across business and personal accounts, collectable tax debt has more than doubled since 2017, from $20.9 billion to an estimated $50 billion, budget papers reveal.

The largest share of this is about $30 billion in Goods and Service Tax. The more aggressive push on tax has led to an increase in corporate insolvencies.

Mr Beresford said trends in personal insolvencies often lagged about nine to 12 months behind corporate insolvencies. In 2022-23, 12.1 per cent of people who entered personal insolvency worked in construction, 11 per cent in social and healthcare assistance, and 9.5 per cent in retail.

Mr Beresford said one of the key drivers of personal insolvency would be employment.

“The only way to stay afloat is by keeping employed,” he said. “If they don’t sustain a job, they are very quickly in trouble.”

Mr Beresford recommended those who are struggling should talk to the institutions they owe debts to early. He said the ATO and the big banks had been working harder with their hardship provisions.

“What happened with COVID is debtors reached out to the creditors, particularly the banks, and actually had a constructive conversation. Banks gave them a payment holiday, or refinancing terms, or interest only in advance,” he said.

“They actually found the experience worthwhile. If debtors speak early to their creditors, creditors will often seek to help them through a period of difficulty.”