There are many reasons why people fall on hard times and come up against seemingly insurmountable debts. It is not always the debtor's own fault that these situations occur either – external factors can have a huge bearing on our own credit.
External factors can have a huge bearing on our own credit.
However, the Australian Financial Security Authority (AFSA) has identified the most common causes of personal insolvency where a business matter is not involved. This might help you identify risk factors in your own financial situation, getting ahead of any issues and addressing them proactively.
Unemployment, or loss of income
According to the Australian Bureau of Statistics (ABS), our jobs market is moving from strength to strength at the moment – unemployment went down 2.2 per cent between May and April this year, and it dropped 5.2 per cent on an annual basis.
However, that still leaves a number of people that are dumped from their employment every month. AFSA recorded 8,418 personal insolvencies in the 2013-2014 financial year due to having no job, or losing a significant amount of income.
This can be protected against to a degree, with the right insurance and pre-insolvency advice. It might not prevent the loss of income, but you may be able to financially prepare for such an event.
Overusing your credit
This was the second most common cause of personally insolvent debtors, as recorded by AFSA. With 6,999 people in this boat over 2013-2014, there are many steps people might be able to take to proactively address credit problems.
The Australian Securities and Investments Commission's MoneySmart website has a wide range of resources, and recommends financial counselling to help you organise and stick to budgets. Dealing with debt by yourself can be a harrowing experience – make good use of counsellors, friends and financial advisors around you to tackle anything that could spiral out into a personal bankruptcy issue.
Breakdown of relationships
Many Australian marriages end in divorce. In fact, the ABS recorded more than 46,000 divorces in 2014 alone. The breakdown of a relationship is a natural step in many partnerships as people grow apart, but it can have dire financial consequences.
You may find yourself in a position where you inherit debts from your partner, or are no longer able to pay off existing credit due to time-poverty. Whatever the exact reason, there were 3,056 debtors that cited relationship breakdowns as the cause of their personal insolvency throughout 2013-2014.
The inability to work can strike at any time, especially if it is due to illness or injury. On top of this, you can find that medical bills spin out of control in the wrong circumstances. AFSA recorded a slight year on year decrease in people becoming personally insolvent due to ill health, but this number was still 2,160.
From here, the AFSA statistics do not have any causes of personal insolvency that recorded more than 700 cases, but these cases are still worth looking at, to highlight risk factors in people's financial standing:
- "Adverse legal action" (being sued);
- "Gambling or speculation";
- "Liabilities due to guarantees".
The rest of the data comes under reasons that were not stated, or simply the "other" category. While you may not require personal bankruptcy advice right now, being able to identify pain points that could extrapolate into full-blown debt struggles is an important part of being financially prepared.
These issues can befall almost anyone.
Always remember that these issues can befall almost anyone in Australia – looking at those causes, you can see that many of them are unlikely to be the fault of the debtor directly. If you want to find out more about insolvency and how to deal with it, get in touch with one of the team here at Cactus Consulting.