Unemployment and Credit Card Debts – The Major Causes of Bankruptcy in 2014

Recent statistics issued by the Australian Financial Security Authority (“AFSA”) reveal that for the 2013/14 financial year unemployment/loss of income (8,418) and excessive use of credit card facilities (6,999) were the top 2 causes of personal insolvency. These causes have remained relatively stable since 2007/08 and are not necessarily a huge surprise.
Whilst not overly unexpected, in my experience as a Bankruptcy Trustee it does illustrate what I find commonly happens and should serve as a timely reminder for individuals who may find themselves in a position where their employment has been terminated.

When there is a loss of employment, it is not uncommon after the termination payment has been spent for there to be a tendency to rely on credit cards to continue funding expenses and lifestyles of the individual / family. After all there is a view taken that another job will be just around the corner. Or will it? What was just going provide very short term funding to get through then goes on for many months and additional cards frequently get added along the way. Before you know it there may be about 6 credit cards (and quite often more) all with between a $5,000 – $20,000 limit. Oh and I forgot to mention the odd personal loan and monies borrowed from family members. For example in 2014 I was appointed to a bankruptcy administration where the individual had accumulated 12 credit card debts with combined debts over $250,000. Ouch!!

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With no real change in employment circumstances (ie still unemployed) and no real trimming of family or personal expenses and being able to only make minimum payments, the whole position spirals quickly out of control. This cycle also quite often involves a health issue which can further exacerbate the feeling of helplessness. And then the calls start from the collection agencies appointed by the credit card providers which add more stress.

The statistics also reveal that for 2013/14 excessive use of credit for clerical and administrative workers was the most common cause personal insolvency.

When business confidence is low (ie because there isn’t much top line growth to be easily had in the business) there is a tendency by management to focus on headcount and other overhead expenses to meet profit targets and appease shareholders. This means looking at exiting certain staff. With the unemployment rate currently sitting at a stubborn 6.3%, individuals and households should regularly review their reliance on credit as a means to fund day to day expenses particularly where such debt is not being regularly cleared in full or substantially so.

None of us ever really know what is around the corner, however if we hit corner already burdened with credit card debt, the path then becomes a slippery slope. If you are finding that your financial position is getting out of control why not speak to us for initial free consultation. You can also visit our website jonespartners.net.au and read more blog articles on bankruptcy and related topics. If you would also like to know more about the recent statistics released, please visit www.afsa.gov.au .

Voluntary Bankruptcy – A big thank you from the Bankrupt! Strange – Not Really

Recently I received an email from a former Bankrupt whose bankruptcy I had been administering. The email said “thank you both for your handling of this matter. Whilst a stressful time, your communication and consideration was very much appreciated”.
This individual had accumulated a range of credit card debts of just over $350,000. The incurrence of such debts was largely due to some significant health and family issues that he had been trying to deal with over many years. However, it got to the point where he could no longer make any headway on the level of credit card debt, despite earning a six figure salary. The inability to reduce the debt was taking a toll on his health and overall future perspective.

Consequently after considering the various options, he declared voluntary bankruptcy. In years 1 and 2 of the Bankruptcy, certain realisations were made such as equity in real estate and receipt of compulsory income contributions. These realisations enabled a first interim dividend to be paid to unsecured creditors. All was going to plan.

Importantly, I recall prior to the voluntary bankruptcy commencing that I discussed the topic of “after acquired assets” with him. In particular, my example was that of an interest in a deceased estate that may arise during the 3 year period of a bankruptcy. Certainly, this was not anticipated as the relationship with his family members had become fractured and quite strained. In short, the interest acquired or that devolves upon a bankrupt at the commencement of or during their bankruptcy from a deceased estate is an asset of the bankruptcy and therefore available for the benefit of unsecured creditors.

During the latter part of the 2nd year of the bankruptcy, he received notification from the Executor of his Late Father’s Estate that he had been listed as a beneficiary to approximately ¼ of the Deceased Estate (this such share was worth approximately $400,000). This was quite a surprise given the relationship with his family. When I received such notification from the former Bankrupt and confirmed same with the Executor, I discussed a solution with the Bankrupt which saw me suspend for a period of time of the compulsory income contributions he was making. This afforded him some breathing space, whilst not jeopardising the position of unsecured creditors given the share (or distribution) expected from the Deceased Estate, ie it was going to be sufficient to pay out all unsecured creditors in full, including interest claims.

Subsequent to be notified of the interest, there was a regular exchange of information regarding the timing of the receipt of the Deceased Estate Funds, as well as timely distributions being made to unsecured creditors of the Bankruptcy. Very recently sufficient monies were received from the Deceased Estate whereby a final dividend distribution was made to unsecured creditors and the bankruptcy annulled by force of Section 153A of the Bankruptcy Act.

Whilst from my perspective as a Bankruptcy Trustee, I approached with this Bankruptcy with the same degree of care and skill as any other bankruptcy administration, it is clear that the individual was appreciative of the support, explanations and communications that he received from me and my staff which assisted in him being able to close at this chapter and commence a new one.  After all, there is light at the end of the tunnel for those in financial difficulty.

This bankruptcy administration was also a fantastic outcome for unsecured creditors who saw all monies owed to them repaid!!

Bankruptcy is often demonised by people that know little about it factually (the Jack of All Trades & Master of None!) or alternatively those that have been a recalcitrant bankrupt and did not get away with what they thought they could! Getting the right information about personal insolvency options and the outcomes can very often help alleviate (not eliminate) some of the stress that is part of making this important choice.

If you would like to know more about personal insolvency options or have a client in financial difficulty please do not hesitate to contact me.

Insolvent Builders & Home Warranty Insurance (“HWI”)

For many individuals or couples one of the biggest purchases in their lives will be the construction of a new home. Unfortunately over the years there have been many residential home builders that have gone into some form of insolvency administration and ceased to trade, leaving home owners with an incomplete home and lots of worries.
We are frequently appointed as Voluntary Administrators or Liquidators to residential home builders where they are insolvent. In one recent matter, there has been an instance where the HWI policies were not adequate to cover all costs incurred in completing the homes. We highlight in this article some important considerations customers should give if such an event occurs.

HWI is taken out by the residential home builder and is designed to cover customers. From 1 July 2010, the NSW Self Insurance Corporation, trading as the NSW Home Warranty Insurance Fund, took over as the sole provider of home warranty insurance in NSW. QBE Insurance (Australia) Limited and Calliden Insurance Limited were appointed as insurance agents of the NSW Self Insurance Corporation, through a contractual arrangement.

Importantly HWI provides a set period of cover for loss caused by defective or incomplete work in the event of the death, disappearance or insolvency of the residential home builder.

From 1 July 2002 a key element of a HWI policy is that it must indemnify beneficiaries (i.e. the customer) for non-completion of work due to early termination of the building contract. Insolvency of the residential home builder typically results in the termination of the building contract.

Critically from 1 February 2012, a HWI policy:

  • is required to be obtained where the contract price is over $20,000 or, if the contract price is not known, the reasonable market cost of the labour and materials involve is over $20,000; and
  • must provide cover of at least $340,000.

Relevantly claims for incomplete work are limited to 20% of the contract price (up to a maximum of the cover provided under the policy). It is this aspect that we believe is not always well understood by customers and indeed the residential home builder when insolvency occurs. We have set out below a recent matter we were appointed to highlight how HWI works when an insolvency event occurs resulting in the termination of the building contract.

Facts

  • Contract value for construction of home $300,000;
  • Costs paid as at insolvency event by home owner for first stages of construction $100,000;
  • Invoice issued by residential home builder for work completed but unpaid $25,000; and
  • Balance outstanding under contract at time of insolvency event / Liquidation: $200,000.

At the date of insolvency, the Insolvency Practitioner is often provided with a debtors listing relating to progress claims made by the residential builder. The recovery of each debtor is not always straight-forward and an accurate position regarding what the customer may owe (if any) can only be determined once the HWI is finalised. This can take many months to determine.

Given the above facts, the HWI and customer position unfolded as follows:

  • Following the liquidation of the residential builder, the customer lodged a claim under the HWI policy.
  • The Home Warranty Insurer arranged for an external consultant to inspect the dwelling to confirm / quantify the amount of works required to complete the contract.
  • The customer also had to prove to the Home Warranty Insurer the quantum of payments made to the residential home builder under the contract. In this case no “cash” payments had been made, but in circumstances where this occurs, this can create issues.
  • Three (3) quotes were obtained from different builders to complete the works. The Home Warranty Insurer then approved one of the builders to complete the works.
  • The certified costs to complete the dwelling were $250,000. Therefore, the customer paid the balance of the original contract price being $200,000 and made a claim for the additional $50,000 under the HWI policy.
  • In this case as the additional cost to complete the dwelling was less than 20% of the original contract price, the HWI covered the additional $50,000 that was required to complete the construction of the dwelling. Therefore there were no monies collectible under the outstanding progress claim in the Liquidation.
  • HOWEVER, if the certified costs had been for example, $285,000 (thus meaning the additional costs were greater than 20% of the contract price), then the customer would have had an uninsured loss to the extent of $25,000 that would have to be met from their own funds. In the particular insolvency administration concerned, there were 3 customers who ultimately had uninsured losses ranging from $25,000 to $60,000 per customer. Not insignificant!!

Unfortunately when an insolvency of a residential home builder occurs, it may take several months to work through this process and it will only be at the conclusion of the building contract once all of the costs are known, that the Liquidator would be in a position to determine if there is actually any debt owning by the customer.

It is important that customers get the right advice as to their position when their builder has been placed into some form of insolvency administration. We caution customers who want to go off miss-informed and complete the dwelling themselves as once this occurs they are likely to jeopardise any ability to claim on HWI.

 

Insolvency and Bankruptcy Numbers – Not What You Might Expect!

Welcome to our first Newsletter for 2014. A subject we are frequently asked about is what are the insolvency and bankruptcy statistics doing and what inferences can be gleaned from them. During the course of the calendar year we will be providing a regular commentary on movements. Set out in this article are graphs for NSW and Australia for corporate insolvencies and personal bankruptcies / personal insolvency agreements (“PIAs”) during the period 2010 to 2013 inclusive. Some key observations are:
Corporate Insolvencies

  • In both NSW and Australia appointments decreased by approximately 2% in the 2013 December quarter on the previous corresponding period (“PCP”).
  • In NSW there was a negligible change in insolvency appointments in 2013 on the PCP. However, nationally insolvencies increased approximately 1.8% in 2013 on the PCP.
  • In 2013 NSW maintained its average 39% of the national corporate insolvency market.
  • In 2013 creditors voluntary liquidations accounted for approximately 47% of all corporate insolvencies. Whilst some may express surprise about this, our own statistics broadly confirm this and given the relative ease via which this type of liquidation can be initiated by directors we believe it will continue to be widely used particularly by smaller corporates who no longer wish to continue in business.

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Personal Bankruptcies / PIAs

  • In both NSW and Australia appointments decreased by approximately 9% and 8% respectively in the 2013 December quarter on the PCP.
  • In NSW there was a decrease in bankruptcies / PIAs of approximately 12% in 2013 on the PCP. Nationally appointments decreased by 10% in 2013 on the PCP.
  • In 2013 NSW maintained its average 33% of the national personal insolvency market for bankruptcies and PIAs.
  • The three (3) postcodes with the highest number of bankrupts in 2012/2013 were:
  • 2770: Mt Druitt and surrounding suburbs;
  • 2560: Campbelltown and surrounding suburbs; and
  • 2170: Liverpool and surrounding suburbs.

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It will be interesting to monitor the numbers as the year unfolds as to where they may head and what inferences can be taken from them about correlations with the overall state of the national economy. Whilst there appear to be several economic challenges ahead (for example a notable decline in business capex spending) we generally feel that insolvency and bankruptcies levels are likely to remain flat throughout 2014.

Strengthening our Presence in Greater Western Sydney

For many years now, Jones Partners has truly valued that importance of being accessible to professional advisors and business owners and individuals throughout Greater Western Sydney (“GWS”). The GWS  region is a very significant contributor to the States GDP and has a huge diversity in the range of businesses that operate within it. Our continued presence (via our Norwest Business Park Office) has enabled us to develop strong relationships with other professionals such as accountants, lawyers and financiers, as well as and importantly assist business owners and individuals in this region who may get into financial difficulty. Having a very strong and keen interest in what happens in the region also helps us to understand the factors that can affect SME businesses as well as individuals.
To further build on our presence and focus in the GWS region, we are excited and pleased to announce the opening of our South West Sydney Office at Narellan. As with our Norwest Business Park Office, the new Narellan office puts us closer to fellow professionals and SME businesses and individuals when they need expert insolvency, restructuring or bankruptcy advice in South West Sydney. We believe this proximity and not “the ivory tower” approach is what such stakeholders are seeking when looking for specialist advice in corporate and personal insolvency and restructuring.

Our continued and sincere focus throughout the GWS region reflects the importance we place on ensuring that SME businesses and individuals in this region get the “right advice” when they may be in financial difficulty. Jones Partners are a Chartered Accounting Firm that specialises in the provision of corporate and personal insolvency and restructuring services. For more information go to jonespartners.net.au

Small Business Survival Tips

On 28 August 2013, I hit the airwaves on Eagle Radio – which is Australia’s first and only radio station dedicated to empowering small businesses. As an Insolvency Practitioner that specialises in advising small to medium sized businesses when they are in financial difficulty I highlighted what are the key ingredients that keep a small business afloat. Unfortunately many small businesses don’t make it through the early years of their commencement and can end up in liquidation.
There is no doubting that small business is a vital ingredient as part of a thriving Australian business community. Running a small business carries risk, but also enormous opportunity if managed correctly. Click on the link below to listen to the interview.

Radio Interview

If would like to discuss any aspect of the interview, please don’t hesitate to drop me a line.

All the best.

 

 

 

 

 

Interview with Eagle Waves Radio – The Voice for Small Business

Looking forward to chatting with John Hagerty (co-host of the Eagle Business Show) today at 11.00am and discussing what key factors small business owners need to consider to “keep on top” and ensure they remain afloat particularly when business confidence remains low.
Eagle Waves Radio is Australia’s first and only radio station dedicated to empowering small businesses.

Catch up now listen to the Podcast