Why Christmas could push business owners to the insolvency cliff

As the holiday season approaches, small business owners are facing a financial storm. A trio of stressors – tax debt, lack of finance options, and skyrocketing strata debt – is pushing more individuals into personal insolvency. Insolvency and business turnaround specialist Jirsch Sutherland warns the situation is likely to worsen as we get closer to Christmas.

Surge in personal insolvencies

Recent data from the Australian Financial Security Authority (AFSA) paints a grim picture. In the June quarter of 2024, 2,947 new personal insolvencies were recorded, up from 2,705 in the same period in 2023. Even more concerning is the 8.9% rise in July 2024, with 1,157 people entering formal insolvency proceedings.

“Three key stressors are tipping people into financial distress: tax debt, the inability to raise further finance, and strata debt,” explains Stewart Free, Bankruptcy Trustee and Partner at Jirsch Sutherland.

Free highlights the mounting pressure of tax debt, particularly from the Australian Tax Office’s (ATO) Director Penalty Notices (DPNs), which are catching up with current and former company directors. “The DPNs are contributing to a rise in business-related personal insolvencies, as business owners who can no longer meet tax obligations are left with few options,” says Free.

Lack of finance and credit card dependence

Another major issue is the inability of small business owners to secure additional finance, which is leading many to exhaust all avenues in their effort to stay afloat. Free notes, “We’re seeing a spike in business owners and individuals who have exhausted all financing options in a bid to pay debts. That’s also leading to ballooning credit card debt.”

This reliance on credit cards is pushing many to the brink, as they use them to cover both business and everyday living expenses. With credit limits maxed out and no other financing available, individuals are being pushed over the financial edge, resulting in formal insolvency.

Strata Debt – The silent killer

Strata debt is becoming a growing concern, with more property owners falling behind on their levies, leading to an alarming increase in strata debt-related bankruptcies.

“More and more property owners are falling behind on their payments, and that’s leading to a spike in strata debt-related bankruptcies,” Free explains. As strata fees increase and cost-of-living pressures mount, individuals are left unable to meet these obligations, leading to devastating consequences.

Christmas – A financial tipping point

The looming Christmas season, traditionally a time of financial strain, could be the tipping point for many small business owners. According to Free, “Christmas can be a major financial trigger – and currently there’s the added stress of a cost-of-living crisis.”

He predicts that many will rely heavily on credit cards and buy-now-pay-later schemes, leading to what he describes as a financial “hangover” in the months following the festive season. “I foresee the situation worsening because of the financial ‘hangover’ that comes from over-reliance on credit cards and buy-now-pay-later schemes,” says Free.

Personal insolvency agreements rise

Despite the gloomy outlook, Free believes there may be a rise in the use of Personal Insolvency Agreements (PIAs) as an alternative to bankruptcy. PIAs allow individuals to avoid declaring bankruptcy by entering into a formal agreement with their creditors.

“In the three months to June 2024, there was a 74.3% jump in PIAs, and while the numbers are still quite low, I believe there’ll be an increase as people realise there are other options instead of having to declare bankruptcy,” says Free.

For small business owners feeling the pinch, it’s essential to understand the options available to manage unmanageable debt. “There are always options, whether it’s bankruptcy, a PIA, or other solutions. The important thing is to seek help early and move forward in life,” Free advises.

As the holiday season draws near, it’s a critical time for small business owners to assess their financial health and take proactive steps to avoid falling into the personal insolvency trap.

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