News

Bankruptcy hits the middle class, with insolvency rates up more than 250%

Media Release, Tuesday 24 March 2009

Personal insolvency rates in Australia, including bankruptcy, have increased 261% over the past 18 years and, increasingly, it is the middle class that is most affected, according to an Australian first study completed at the Melbourne Law School.

The study, authored by Professor Ian Ramsay and Cameron Sim of the University of Melbourne’s Centre for Corporate Law and Securities Regulation, investigated personal insolvency, which includes bankruptcy, debt agreements and personal insolvency agreements under the Bankruptcy Act, from 1990 to 2008.

The study uncovered a 261% increase in personal insolvencies over the period, with a 12.2% jump over the past year alone, comparing the last six months of 2008 with the last six months of 2007.

Australia’s well documented love of credit proved to be one of the biggest causes, with a 106.2% rise in non-business related bankruptcies linked to excessive credit since 1997.

Gambling and speculation has also increased dramatically as one of the key causes for non-business related insolvency, increasing in occurrence by 229.2% since 1997.

The study also found an increasing number of bankruptcies occur with people who have dependents, up from 35% in 2005 to 49% in 2007. There’s also been increases in the number of insolvents who are managers, administrators or professionals: last year 27.34% of bankrupts came from this area, an increase of 142.4% from 1999 levels.

“This is strong evidence that bankruptcy is becoming more of a middle class phenomenon,” according to Professor Ramsay. “Bankrupts are increasingly coming from higher status occupations, have increasing levels of personal income and household income, and have increasing asset and property ownership levels.”

Professor Ramsay warns that bankruptcy is going to be an ongoing issue as the financial crisis continues. “Rates of personal insolvency have grown since 1990 - when economic times have generally been good. Now that we are experiencing very difficult economic times, the rate of personal insolvency is increasing and we can expect to see it grow across more parts of Australian society.”

“The study shows that bankruptcy is now a real issue for parts of the Australian middle class and also for older Australians”

Other key findings of the study include:

• An increase in ill health related bankruptcies up 58.5% on 1997 levels, with ill health accounting for almost 12% of non-business related bankruptcies in 2008.

• Increasing age of bankrupts. In 1997, 26.25% of bankrupts were aged 45 or older. In 2008, 45% of bankrupts were aged 45 or older - an increase of 71.4%. In 2008, there were 3,446 more bankrupts than in 1997, and there were 5,802 more bankrupts aged 45 or older than in 1997

• Age linked to excessive use of credit. In 1997, excessive use of credit caused 21.83% of non-business related bankruptcies for those aged 45 or older, compared to 55.91% in 2008, an increase of 156.1%

• Increasing debt levels. In 1997, 62% of bankrupts had unsecured debt less than $20,000, compared to 33% in 2007, a decrease of 46.8%. In 1997, 16% of bankrupts had unsecured debt of $50,000 or more, compared to 35% in 2007, an increase of 118.8%

• Inability to pay the house mortgage. Examining only the creditors of bankrupts which are finance organisations, in 2007, 16% of these creditors were house mortgage finance organisations - up from only 2% in 2005, an increase of 700% in only two years

• NSW bankruptcy increase. NSW has had a significant increase in bankruptcies compared to other states. There was a 49% increase in the proportion of bankruptcies in NSW between 1997 and 2008. In 1997, NSW contained 33.90% of the population and 25.71% of bankruptcies. In 2008, NSW contained 32.60% of the population and 38.25% of bankruptcies. The increase in the proportion of bankruptcies in NSW occurred largely between 2003 and 2008

• Small debts can result in bankruptcy. In 2007, 5% of bankrupts had less than $2,000 in unsecured debt; another 3% had between $2,000 and $4,999; and another 8% had between $5,000 and $9,999. Therefore, 16% of bankrupts had less than $10,000 in unsecured debt. Another 17% of bankrupts had between $10,000 and $19,999 in unsecured debts.

Journalists please note: Broadcast quality footage of Professor Ramsay discussing the research is available from our FTP server at media.marcom.unimelb.edu.au/pub/newsroom/ramsay1_mr_20090323.mov

The complete study is available at cclsr.law.unimelb.edu.au/go/news/index.cfm