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Bankruptcy threshold of $5000 is a ticking time bomb for home owners

Sydney Morning Herald logo Sydney Morning Herald 6 days ago Elizabeth Minter
a group of people standing in front of a machine: Credit providers should only sell to debt collectors with good financial hardship practices. © Paul Rovere Credit providers should only sell to debt collectors with good financial hardship practices.

"If you owe the bank $100, that’s your problem; if you owe the bank $100 million, that’s the bank’s problem." And to rewrite J. Paul Getty’s famous line for modern Australia: "If you have a $5000 debt, you could lose your home."

The threshold for making someone bankrupt is $5000 – be it a credit card debt, a tax debt, arrears on a personal loan or mortgage or any other type of credit. And when you consider the figures around financial hardship in Australia, this $5000 threshold is a time bomb for many home owners. Because a $5000 debt can quickly escalate to a $60,000 debt.

Data from Digital Finance Analytics shows mortgage stress hitting an all-time high, with more than 1 million households (31 per cent of owner-occupied borrowing households) in financial difficulty. Meanwhile, nearly 2 million people are struggling with credit card debt, with a total of $45 billion owed by all Australians who have credit cards.

The new report "Who is making Australians bankrupt?" jointly released by the Consumer Action Law Centre, Financial Counselling Australia and the Financial Rights Legal Centre discloses for the first time which creditors are seeking to make Australians bankrupt. The research is based on data from the Federal Court over the past four financial years, and the figures are startling. While the figures are only approximates, clear trends can be seen.

The standout company was debt collecting company Lion Finance, which made court applications for bankruptcy 512 times in the 12 months from July last year to June this year. While the Australian Tax Office was also a prolific user, suing 543 people in the past financial year, its use of the legal system has dropped dramatically. Four years ago the ATO sued 1215 people for bankruptcy.

Among financial services providers, American Express applied to make 119 people bankrupt, more than 10 times the number made bankrupt by the big four banks combined in the past financial year.

When a person falls behind on repayments, the finance provider can either collect the debt themselves, engage a debt collector to act for them or sell the debt to a debt buyer, usually for a fraction of the face value of the debt, as low as 20 cents in the dollar.

However, the debt buyer has the right to recoup the full amount of the debt, including interest and fees.

There are many ways they do this – some are humane and decent; others are aggressive.For example, some debt buyers use long-term payment plans or accept partial payment to settle the entire debt. However, in more extreme cases, debt buyers take legal action.

The whole thing can turn into a debt spiral, with legal and other costs continually added throughout the bankruptcy process.

This makes it less likely the borrower will be able to find the money to stop being declared bankrupt. That a credit card debt of just $5000 could, and does, lead to the loss of the family home is extremely poor public policy.

A few key changes would protect people. They include: raising the threshold to $50,000 before a creditor can use forced bankruptcy – people should not lose their homes over small, unsecured debts when there are other ways to collect on them; banks requiring in their contracts that debt buyers do not use the bankruptcy system where the original debt was less than $50,000; credit providers committing to only sell to debt collectors with good financial hardship practices and that bankrupt people only as a last resort; and credit providers committing to not selling debts where they know a person is on a Centrelink income or are vulnerable, such as having a disability.

The ATO also needs to improve its hardship practices. The government should not be bankrupting people where there are other options. A taxpayer should also be able to seek an independent, binding review of decisions by the ATO to either grant or not grant a hardship arrangement and its terms. The review body could be the Inspector-General of Taxation.

John P. Getty didn’t have to worry about losing his house but many Australians will continue to lose sleep unless we change laws that are being misused.

Elizabeth Minter is the Communications Manager of Financial Counselling Australia.

Pictures: Sport Stars who went bankrupt

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