“Who’s making us bankrupt?” or “what are debtors doing about it?”

Financial Counselling Australia (FCA) has called for “urgent” reforms to Australia’s bankruptcy laws after releasing its report, “Who’s Making Australians Bankrupt? A follow-up report: six years on”.

Following on its earlier report, it reveals that what it calls “forced bankruptcy” – ordered by the court – is concentrated among a small number of creditor types, “often over debts as small as $10,000″.

The largest single creditor is the Australian Taxation Office (13%) in relation to taxpayers who have not paid their taxes.

Strata bodies (12%) %) in relation to unit owners who have not paid their levies have “surged. Strata-related bankruptcies are up 33% nationally, with NSW leading the trend”.

Non-bank business lenders (12%) and motor vehicle finance companies and private schools are said to also be emerging as significant users. Small business owners are at risk, with business-related debts often leading to personal bankruptcy.

According to AFSAs annual administration statistics for 2024-2025, there is in fact a slightly higher proportion of creditor-initiated bankruptcies.  In that year, 88% of new bankruptcies were by voluntary debtors’ petition, a fall from 90% in 2023–24. The remaining 12% of new bankruptcies in 2024–25 were court sequestration orders. 

FCA calls for action to raise the bankruptcy threshold to $20,000 and indexing it annually; and also to create a “Minimal Asset Procedure” as an appropriate voluntary bankruptcy pathway for vulnerable debtors; that is, allow that group a ‘one year’ period of bankruptcy. 

This would leave small traders and other workers subject to 3 years of bankruptcy restrictions, even though FCA says that practical reforms are urgently needed to ensure “fairness and consistency in the system”.

FCA says that

“forced bankruptcy is one of the most serious tools available to creditors and should only be used as a genuine last resort”

and without

“stronger safeguards and modernised laws, Australians risk losing their homes and livelihoods unnecessarily over relatively modest debts”.

Comment

A petitioning creditor must be able to show that creditors collectively serve to benefit?

The idea of forced bankruptcy being available only as a matter of last resort has been raised in the context of whether a single creditor should be able to initiate bankruptcy proceedings against a debtor at all, for whatever amount, unless that creditor can show that creditors collectively serve to benefit: see Involuntary bankruptcy as debt collection: multijurisdictional lessons in choosing the right tool for the job, Kilborn & Walters, (2013) 87 Am Bankr LJ 123. 

As I say in Australian root and branch bankruptcy reform – creditors’ rights? Elizabeth (Ist) laws? SMEs? … – Murrays Legal , with bankruptcy dividend returns now averaging 1.31 cents in the dollar in 2024-2025, that benefit must be rare. 

No routine bankruptcies?

Perhaps it should be the case that a creditor should not seek a forced bankruptcy as a matter of routine, for example to satisfy some write-off requirement before an insurance claim can be made. That is not the case now. 

In Ippolito v Cesco [2021] FCA 656, where it was a condition of a home builders warranty insurance that the insured was not able to recover damages from the builder because of the builder’s insolvency, the Court held it was legitimate for the insured home owner to pursue the builder to bankruptcy to activate that process.  See Keay’s Insolvency, 11^th ed, Abuse of process [3.375] for other examples.  Another might be to pursue bankruptcy to satisfy an “irrecoverable at law” statutory requirement. 

That idea would unduly qualify the proper role of a petitioning creditor in bringing about the bankruptcy of an insolvent debtor not only for itself but for all other creditors. 

An alternative view?

Another way of looking at FCA’s proposal that the threshold be increased to $20,000 is that it would potentially allow insolvent debtors to continue to incur unpayable debt. 

Those in business not paying their tax debts are unfairly taking advantage of those who do, which bankruptcy could stop.  Those owning home units, compared to those who cannot afford to own, are putting the bodies corporate to unnecessary expense in not paying their levies.  And the fees of public schools have no capacity to make a parent bankrupt.

Reform?

The government raised the idea of lifting the threshold in 2023 but nothing has been heard since.  If this is the level and extent of bankruptcy reform being considered, it should not take the government long to decide, with the benefit of the views of the FCA.