Personal Debt

With Australians spending an estimated $65billion on Christmas shopping in December 2023, some consumers were not able to pay off their credit card and or buy now pay later finance when they become due in late January or February 2024. Some have sadly declared bankruptcy, which is the theme of this months’ Viewpoint.

In 2022 there were 6792 new bankruptcies in Australia. As of 31 December 2022, there were 41,564 undischarged bankrupts in Australia. The overwhelming majority of these (90 per cent) originated from voluntary debtor’s petitions. I think it’s time we started talking about the sad incidence of personal bankruptcy. Let’s begin the discussion with an etymology lesson.

The word ‘bankrupt’ comes from the Italian, banca rotta, meaning ‘broken bench’. In the sixteenth century, money lenders in Florence conducted their business on benches in outdoor markets where they exchanged money and bills. When a banker failed, his bench (aka “bank”) was broken by the people as a mark of infamy and he was called a bankrupt.

During the first half of the 19th century, debtors’ prisons were a common way to deal with unpaid debt in Europe. The father of English novelist, Charles Dickens, was imprisoned with his family in 1824 for a debt to a baker. Dickens later wrote about prison life in his masterpiece, Little Dorrit. The US also had debtors’ prisons but abolished them in the 1830s.

While the practice of publicly humiliating debtors no longer occurs, the propensity of people to get in over their heads has not changed. The mantra of some consumers today is: “I want it, I want it now and I’ll borrow rather than save for the things I want”. The end result for these individuals is often over-commitment and unsustainable household debt.

We have become a society of credit junkies. For many, materialistic expenditure is the drug of choice. Of course, there are those who would point the finger for rising personal indebtedness at over-eager banks and other lenders. But this is too simplistic.

Despite advice to the contrary, many people deliberately pile on debt, typically racked up on several credit cards and or buy now pay later credit. These individuals often see bankruptcy as an easy and attractive option. Bankruptcy no longer has the social stigma it had in the past. It is now seen by many as a quick way of extinguishing debts in the mistaken belief that one’s slate will be wiped clean.

Bankruptcy, however, should be an absolute last resort as the results are long lasting and far reaching. It can destroy an individual’s credit rating and make it difficult for the person concerned to borrow again for some time. (Note: All prudent lenders would rather put in place a repayment plan rather than repossess a property or bankrupt a borrower.)

In fairness, some bankruptcies are caused by illness, divorce, a death in the family or redundancy. These largely uncontrollable events – “life’s accidents” – should be viewed with compassion. In Australia, the number one trigger for bankruptcy is unemployment. Moreover almost 40 per cent of mortgage delinquencies are caused by injury and illness.

Bankruptcy laws have evolved over thousands of years and now protect debtors as well as creditors. But I believe the pendulum has swung too far. Some debtors are using bankruptcy as a modern day “get-out-of-jail-free” card. For my money, it’s far too easy for Australians to declare bankruptcy and amendments in more recent years to bankruptcy laws make bankruptcy seem an easy option which it shouldn’t be.

It seems to me that both borrowers and lenders have a role to play in addressing the rising incidence of bankruptcy. Financial institutions need to do more to improve financial literacy skills and consumers need to become better money managers and live within their means.

If you or someone you know experiences a change in personal circumstances and are struggling to keep up the mortgage payments or other debt obligations, don’t stick your head in the sand. Contact your lender and negotiate an affordable repayment arrangement.

Don’t wait until you are on a slippery slide to a “mortgagee sale” and/or “bankruptcy”!

Sincerely
John (JT)Thomas

This opinion piece is provided by John (JT) Thomas, a 48- year veteran of the financial services industry and since 1987 a specialist in commercial mortgage funds. Considered by many to be the father of the modern commercial mortgage fund sector, JT helped establish and then managed – for 17 years – what became the largest and most successful commercial mortgage fund in Australia – The Howard Mortgage Trust – with assets exceeding $3 billion. Under JT’s stewardship, investors never lost one cent of their investments and indeed, investors always received competitive monthly returns. JT was also Chair of the $40 billion mortgage trust industry sector working group.

JT has been proudly involved with Princeton for nine years and sits on both the Princeton Credit Committee and the Princeton Compliance Committee as well as being an advisor to the Princeton Board.