Bankruptcies up, but business owners holding on

The economic downturn has triggered a big rise in the number of personal bankruptcies last financial year, but despite the hard times business owners may have bucked the trend.

The economic downturn has triggered a big rise in the number of personal bankruptcies last financial year, but despite the hard times business owners may have bucked the trend.

Close to 26,000 people filed for bankruptcy in 2007-08, 2.9% up on the previous year, according to new data released by the Insolvency and Trustee Service Australia.

The June 2008 quarter alone accounted for 7058 bankruptcies, well over a quarter of the total for the year and 7.4% up on the same period in 2007.

Tasmania saw the biggest increase in bankruptcies, up a whopping 15.9% for the year, while NSW also faired poorly with a 7.47% increase.

NSW accounted for 9938 of the nation’s bankruptcies, close to half the national total.

South Australia faired best among the states with a 3.16% drop in bankruptcies, while Queensland also experienced a small (0.71%) fall.

But despite the overall increase in bankruptcy numbers, the proportion that resulted from involvement or an interest in a business actually declined in 2007-08.

Last financial year 17.4% of bankruptcies were business related, down from 19.6% in 2006-07. The overall number of business related bankruptcies also dropped from 4935 to 4519.

The consumer addiction to credit card debt could be one explanation for the shift, with the bankruptcies caused by excessive credit use lifting from 11% in 2000 to 27% in 2006-07.

The rise of the global credit squeeze could mean those numbers moved even higher in 2007-08 according to Jim Downey, principal with insolvency practice JP Downey & Co.

“I think there are a lot of people who live their lives with credit cards maxed out permanently, and they are probably finding it harder to consolidate those debts into bank loans because of the credit squeeze,” Downey says. “That means being stuck with compound rates at 20% instead of 8%, so unless you are very skilled at paying the minimum on by rotating the whole thing through, it is very hard to keep all the balls in the air.”

The data also reveals a jump in the use of personal insolvency agreements, a kind of voluntary administration under which creditors agree to accept only a portion of the money they are owed.

There was a 42.4% increase in personal insolvency agreements in 2007-08 to 309, with a third of those coming in the June quarter alone.

Personal insolvency agreements are particularly attractive to professionals such as barristers, solicitors and accountants because they can potentially shorten the period of bankruptcy and any associated disqualification from practicing, Downey says.

Read more on credit card debt, bankruptcy and insolvency