Home / Bankruptcy / THE INCIDENCE AND CAUSES OF PERSONAL BANKRUPTCY

THE INCIDENCE AND CAUSES OF PERSONAL BANKRUPTCY

Bankruptcy is a legal process enabling people with unmanageable debt to obtain a release from
their obligations, and start afresh after a period of three years. The earliest English bankruptcy
laws were enacted in 1542 and were essentially punitive in nature. The Act Against Such Persons
As Do Make Bankrupts roundly condemned debtors who ‘consume the substance obtained by
credit of other men, for their own pleasure and delicate living, against all reason, equity and good
conscience.’ This Act, and subsequent early modern statutes, imposed harsh penalties upon
bankrupts, ranging from imprisonment to being ‘set upon the pillory’ and ‘having on[e]… ea[r] cut
off’ (Bankruptcy Act of 1623). At the same time, these early acts sought to establish a measure of
fairness and order in the debt recovery process, by ensuring that debtors’ assets were distributed
equally among their creditors (Levinthal 1919, p. 14). This latter goal has gradually assumed
greater prominence as the law of bankruptcy has developed, while the sanctions imposed upon
debtors have become considerably less severe. Current Australian bankruptcy law (Bankruptcy
Act 1966 (Cth)) now stresses the pragmatic goal of equitable asset distribution, rather than the
punishment of debtors (Law Reform Commission 1988, pp. 15—17).

THE INCIDENCE AND CAUSES OF PERSONAL BANKRUPTCY
When debtors declare bankruptcy, their assets must be handed over to a trustee.2 For a period of
three years, these individuals must submit to a range of legal restrictions and make contributions
towards their debts, if their incomes exceed a certain threshold. At the end of this period,
bankrupts are freed from their legal restrictions and their remaining debts are discharged. In
2016, the Federal Government announced its intention to reduce the period of bankruptcy from
three years to one, in order to promote entrepreneurship and reduce the stigma associated
with bankruptcy (Treasury 2016). If implemented, these changes would further emphasise the
pragmatic, rather than punitive, function of Australian bankruptcy law.

Although a form of bankruptcy has been part of Australian law since the early nineteenth century
(Allsop and Dargan 2013), the academic study of bankruptcy is a relatively recent phenomenon
in this country. Some studies have considered the policy objectives underlying Australian
bankruptcy law and ways in which the law could better meet these objectives (Howell and
Mason 2015). Others have addressed specific topics such as the treatment of gambling debts
and the interaction between bankruptcy and family law (Duns 2007; Fehlberg et al. 2014). Yet
to date, few Australian researchers have carried out empirical studies of bankruptcy (Ryan 1995;
Ramsay and Sim 2009; Ramsay and Sim 2010).

By contrast, the United States (US) has produced a great deal of empirical bankruptcy research, most notably the Consumer Bankruptcy Project.

This collaborative project has been underway since 19813 and has examined a vast body of data
including court records, written surveys and interviews with current and former bankrupts. The
Consumer Bankruptcy Project has explored the causes of bankruptcy; the obstacles that debtors
encounter when attempting to seek bankruptcy relief; the bankruptcy experiences of specific
groups, such as single mothers, African Americans and retirees; and many other topics. This US
literature demonstrates the enormous potential for empirical techniques to improve researchers’
understanding of bankruptcy law and guide policy makers in identifying areas requiring reform.

This article seeks to contribute to the developing body of Australian empirical research, by
examining a large and unique data set obtained by the authors from the regulator, the Australian
Financial Security Authority (AFSA). In line with its privacy policies and its commitment to
facilitating bankruptcy research, AFSA has provided a data set of nearly 29,000 de-identified
records of individual bankruptcies initiated between 2007 and 2016. The authors have analysed
this data to form a clearer understanding of the trends in, and salient features of, Australian
personal bankruptcies over the past nine years.

4 This is the first Australian empirical study to be
based on a data set of this magnitude and comprehensiveness, and the first to employ statistical
techniques to analyse such data. It demonstrates the significance of AFSA’s unpublished data as
a resource for researchers and policy makers.

Data
AFSA provided the authors with 28,683 records entered between 1 July 2007 and 20 June 2016.
The sample represents 10 per cent of all bankruptcies filed during this period, and has been
selected randomly, to make it broadly representative of the bankrupt population as a whole.
Of the records provided, 79 per cent5 (or 22,517) relate to personal (or non-business-related)
bankruptcies. The remaining 21 per cent (6,166) relate to business-related bankruptcies. The data
set includes each individual’s sex, age, occupation, income, source of income, family situation
and, if appropriate, spouse’s income.

It identifies each individual’s state of residence and whether
or not the individual lived in a ‘major city’, ‘inner regional’, ‘outer regional’, ‘remote’ or ‘very
remote’ area, as defined by the Australian Bureau of Statistics (ABS).6 The data set includes the
cause of bankruptcy, as nominated by each individual when completing his or her Statement
of Affairs (SOA) form at the commencement of bankruptcy; or, in the case of an involuntary
bankruptcy, on the basis of information supplied by creditors. It also provides details of each
individual’s unsecured assets and liabilities at the time of bankruptcy. It lists the primary source
from which each debtor obtained information about bankruptcy, and whether or not each debtor
had ever been bankrupt before.

While this data set is extremely rich, it has a number of limitations. In the first instance, the
data is provided by bankrupt debtors themselves, at the commencement of their bankruptcies.

Existing empirical studies demonstrate that the period leading up to bankruptcy is frequently
marked by intense stress and a sense that one’s financial problems have become overwhelming
and unmanageable (Sullivan et al. 1999, p. 244). For this reason, it is likely that some of the
data reported by debtors at the commencement of bankruptcy is inaccurate or incomplete.

The format of the data set also imposes some limitations. Key financial data — income, assets
and (unsecured) liabilities — is recorded in bands, such as ‘$0.01−$4,999.99’, rather than
in precise figures. Banded data tends to obscure true distributions and thus to reduce the
accuracy of statistical calculations such as means and medians. Moreover, the data set does not
include secured assets or liabilities, such as homes and home mortgages, as AFSA is unable to
guarantee the reliability of such data.

Since homes are the primary source of wealth, and debt,
in most Australian households, this is a significant omission. Still, even taking into account these
limitations, the data set provides valuable insights into the circumstances of Australian debtors at
the time of their bankruptcies.

Trends in the rate and incidence of Australian personal bankruptcies
Bankruptcy rates have been falling relatively steadily since 2009.7 This may reflect the growing
popularity of debt agreements, or ‘Part IX’ agreements, among Australians in financial distress
(Ramsay and Sim 2011; Wyburn 2012). Debt agreements allow individuals to enter into a legally
binding repayment arrangement with their creditors and usually involve the payment of ongoing
fees to a private debt administrator. They accounted for 25 per cent of all (non-business-related) personal insolvencies in calendar year 2008. By 2015, this figure had risen to 44 per cent.

Even taking account of the increasing role of debt agreements in the personal insolvency system,
the decline in bankruptcy rates in recent years represents a striking contrast with the trend
in the lead-up to 2009. Total bankruptcies rose dramatically from 8,552 in 1990 to 21,830 in
1997, and 27,483 in 2009 (Ramsay and Sim 2010, p. 289). By contrast, there were only 17,7628
bankruptcies in 2015.

During this period, both men and women have experienced steadily declining rates of bankruptcy. In 2009, 16,689 men and 12,030 women declared bankruptcy. By 2015, only 10,798
men and 6,945 women declared bankruptcy.9 As a proportion of the total adult population,
the incidence of personal bankruptcy over the nine financial years from 2007−08 to 2015−16 is
108 per 100,000. The male incidence is 121 per 100,000 and the female rate is somewhat lower,
at 95 per 100,000. Thus the probability of an adult becoming bankrupt in any given year is
approximately one in 926.

 

About americanslaw

Leave a Reply

Your email address will not be published. Required fields are marked *