Corporate insolvency levels in Australia only account for about 0.30%* of all companies registered with the Australian Securities & Investment Commission ("ASIC") and similarly personal insolvencies account for about 0.25% of all working age individuals^. Therefore, with such low occurrences, it can be very easy to be dismissive of people in financial difficulty. However, walk in the shoes of any business owner or individual that has had to enter into some form of corporate or personal insolvency (either on a voluntary or involuntary basis) and they will tell you a much different story which often has effects on their health and family/social relationships.
Throw into the above, the significant increase in Australian household debt levels over the past 30 years where according to comments made by the Reserve Bank of Australia in late 2018, the household debt to income ratio has increased from 70% to almost 190% and you can hopefully appreciate that there are many individuals/households that are completely fixated in trying to deal with the financial stress they are under.
Whilst initially when debt levels are lower, individuals, households or business owners may be able to cope (both financially and emotionally), it is the accumulation and escalation of the debt levels that causes financial stress.
Indeed "financial issues" are rated as the top cause of stress according to research undertaken by the Australian Psychological Society. Indeed, research undertaken by Wesley Mission a few years back showed that of the households surveyed in NSW almost 40% of households were spending more than they earn.
It is all too easy when you are not under financial stress to believe that there can be so many individuals, households or business owners that are not coping. Indeed, there may even be relatives, friends or business associates that are in financial stress, yet you have little idea. People in financial stress tend to become pretty good at putting on a facade because for many it is seen as an embarrassing thing to talk about. But arguably not talking about it just continues to feed the problem.
Whilst analysing financial stress and health impacts can sometimes be a "chicken and egg" problem, when we suffer from ongoing financial stress, there are a number of powerful stress chemicals that when elevated for constant periods of time can contribute to a weakened immune system and other health issues including anxiety and depression according to medical professionals.
Financial stress is often linked with other things such as relationship breakdown, substance abuse and gambling. It can also be accompanied with a feeling of isolation and social disengagement.
During my time as an Insolvency Practitioner with almost 25 years' experience, I will never say I have seen it all, because each situation is unique and will have different dynamics. It is really critical in my view to carefully listen and understand the individual, couple or business owner and take note of what they believe has led to their present position. Yes, empathy is required, however, I also believe a level of pragmatism and guidance is required to show them that there is light at the end of the tunnel.
Many under financial stress tend to put dealing with it out of their minds or rationalising it some other way (I'll get to it next week) - but the effect is the same - deferral of doing anything about it. It is important to recognise that those under financial stress quite often feel a sense of helplessness. Indeed, I still recall at a creditors meeting a few years back, a creditor saying during the meeting to the directors:
"why did you do this, why have you deliberately ripped everyone off?"
Let me say, I understand that the creditor was frustrated and it was their first touch point with an insolvency process where they were likely to not receive payment of their outstanding debt and whilst the director should have sought professional assistance at an earlier point in time, I am very sure that they did not embark on such process deliberately and put themselves through such an enormous period of stress which coincided with their spouse getting cancer through the process and one of their children developing an eating disorder. The director's normal life had been turned upside down and was completely out of control.
So, what should individuals, households or business owners do? Or how can you help them?
Firstly, take one step at a time.
Seek the right professional advice or if this is not readily available then perhaps seek out a free financial counselling service. At Jones Partners, we offer a free initial meeting or telephone conference so that we can review the financial position and discuss the options with a view to not only dealing with the financial stress, but also with a view to providing a plan for the immediate future. It is important to not just understand what may have led to the present position, but to carefully recommend the best way for them to deal with their financial stress and importantly show them what the end goal looks like. It is important for someone appropriately qualified to take control of the crisis because quite often the impacts of financial stress can be quite emotionally paralysing.
Secondly, realise that starting the journey is hard, but doing nothing will invariably result in a worse outcome. Also recognise that whilst starting the journey won't fix everything overnight, with a continued focus and the right external help, re-booting yourself financially and emotionally can happen. But the sooner you get help and get the right professionals and resources on board, the sooner the weight starts to get lifted off your shoulders.
A Case in Point:
A director operating a family business that provides services in the building and construction sector received a Director Penalty Notice ("DPN") in late October 2018.
The DPN gave the director 21 days to engage with the ATO to either reach a payment plan or put the company into either voluntary administration or liquidation. Any of these three (3) alternatives would have seen the personal liability to him extinguished. The director showed the DPN to their external accountant, however, it would seem that they did not necessarily know the full extent of the DPN regime perhaps as well as someone who is regularly seeing these kinds of Notices. They informed the director that they first needed to bring up to date the outstanding Income Tax Return and the 2018 September Quarter BAS before they could approach the ATO. Even allowing for this being the interpretation of the director, the point is, the time was ticking and ticking very fast.
By the time all this happened and then the external accountant went on extended annual leave just before the Christmas break, the 21-day period had well and truly expired. Consequently, in January 2019, the ATO commenced legal action against the director initially by way of a Statement of Claim. Such claim is for in excess of $250,000.
The director when speaking to the external accountant about this claim was told "it is too late to do anything, you are going to lose everything". Again even allowing some misunderstanding of the situation, when I sat down with the director and his wife who told me that they had a special needs child (as well as 2 other children) and that having to sell the house would leave them in a very difficult position because it would involve relocating their special needs child to a new school and would likely cause big problems. However, after listening to them and asking the right questions about their financial position, I have been able to map out a course of action that whilst will see the director having to contemplate a voluntary bankruptcy, the family home will be saved and a plan that they agree is embarked upon to enable them to get back on track for the future.
I note in this case study the referral to me in this example did not come from the external accountant - rather they found me on the internet. However, that it is topic for another article.
Financial stress can feel like a lonely road, but it doesn't need to be. Make sure you get the right professional advice and as early as possible
and check out the adviser's credentials by asking them and checking it against Government websites.
*data obtained from ASIC statistics for the financial year ended 2018
^data obtained from AFSA statistics for the financial year ended 2018 and ABS