As Australia's official cash rate continues to rise, cost of living spikes and pay rises fail to keep pace with surging inflation, we might be heading for a personal and corporate insolvency cliff, warns Jirsch Sutherland, national insolvency and turnaround solutions specialist.
Michael Chan, Jirsch Sutherland Principal and personal insolvency specialist, says "history could be about to repeat itself".
"The perfect storm is brewing. When rising interest rates are coupled with inflationary pressures, past trends have shown a corresponding rise in bankruptcies," Chan says. "There are distinct correlations: there was a sharp economic slowdown in the mid-90s (following the 1991 recession) when the cash rate and bankruptcies rose simultaneously; bankruptcies and the cash rate were almost in lockstep during the 2007-2008 GFC; and it's a similar situation now.
"And while bankruptcy numbers are currently still stable and homeowners still have some savings, cracks are appearing. For example, staff cuts and recession warnings are more prevalent, the tax man is lurking and regulators are getting ready. We are already seeing a definite increase in corporate insolvencies and believe personal insolvencies will follow."
Chan urges consumers and business owners to do a financial 'health check' to determine their position and to seek help immediately if there are any issues.
"Financial distress can sometimes take you by surprise," he says. "The cost of living is increasing so quickly that even if you're currently employed, you might not be able to service your debts. Having a job doesn't mean you're not at risk of bankruptcy. And there are other pressures to take into consideration: e.g., with the value of homes falling so rapidly, it might put homeowners into a negative equity position, not to mention people falling off the 'fixed-rate cliff' when they revert to sharply higher variable rates. That's why it's so important to speak with your accountant or an insolvency solutions specialist asap to discuss options – before the pressures increase even more."
Some of the options for personal insolvency could include informal payment arrangements, debt agreements, personal insolvency agreements and bankruptcy. "We do not recommend sticking your head in the sand and doing nothing," concludes Chan.
