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PERSONAL INSOLVENCY IN AUSTRALIA: AN
INCREASINGLY MIDDLE CLASS PHENOMENON





Ian Ramsay



and Cameron Sim



Under the Bankruptcy Act 1966 (Cth), there are three regulated forms of personal insolvency: bankruptcy, debt agreements, and personal insolvency agreements. Between 1990 and 2008 there was a 261% increase in the number of personal insolvencies in Australia. We suggest one important aspect of this increase is that Australian personal insolvency has become an increasingly middle class phenomenon. Whilst the concept of middle class is not readily quantifiable, we suggest that several factors reveal that personal insolvency is affecting those who might generally be considered middle class. Our findings have implications for Australias personal insolvency laws. The findings also raise for consideration the connections between personal insolvency laws and broader social issues such as rising debt levels, spending habits and social welfare benefits.
CONTENTS
I Introduction

II Australian Personal Insolvency Law

A Bankruptcy

B Debt agreements

III Background to the Study

A Methodology of the study

B Growing rate of Australian personal insolvencies

C Bankrupts in the US IV Middle Class Phenomenon

A The concept of middle class

B Middle class factors

1 Occupation

2 Personal income

3 Household income

4 Realisable assets

5 Property ownership

V Implications of Findings

A The role, function and importance of personal insolvency laws

B Connections between personal insolvency laws and broader social issues

1 The need for improved personal insolvency data

2 Incurring of debt

3 Spending habits

4 Social welfare benefits



VI Conclusion


Harold Ford Professor of Commercial Law and Director, Centre for Corporate Law and Securities

Regulation, Melbourne Law School, The University of Melbourne.

Research Assistant, Centre for Corporate Law and Securities Regulation, Melbourne Law School,



The University of Melbourne.


I INTRODUCTION
In 2008, Australia experienced a record high of 32,865 personal insolvencies.1 The magnitude of this figure is augmented when placed in the context of the 261% increase seen in the number of Australian personal insolvencies between 1990 and

2008. This growth far exceeded the 24% increase in the Australian population during that period.2 It is indisputable that personal insolvency is affecting a growing number of Australians.



This rise in the number of personal insolvencies took place over periods of economic expansion and low interest rates (as well as the converse), which indicates that the increase is not attributable solely to prevailing economic conditions. In this article we suggest that one important feature of the significant increase is that personal insolvency in Australia has become an increasingly middle class phenomenon. Whilst the concept of middle class is not readily quantifiable, we suggest that increases in the proportion of insolvents with certain characteristics reveals that personal insolvency is affecting a broad section of the population, and increasingly it is affecting those who might commonly be perceived to represent middle class Australians.

We begin with a brief explanation of Australian personal insolvency law. Then we provide background information including details on the methodology of our study; the increasing rate of Australian personal insolvencies; and the results of similar studies conducted in the US. Then we evaluate the concept of middle class, before considering several factors which we suggest indicate that personal insolvency in Australia is becoming a middle class phenomenon. We detail how insolvents are increasingly coming from higher status occupations; have increasing levels of

personal income and household income; and have increasing asset and property



1 Insolvency and Trustee Service Australia, Annual Report by the Inspector-General in Bankruptcy on the Operation of the Bankruptcy Act 2007-2008, 9. This figure relates to the financial year 2007-2008. Provisional statistics for the financial year 2008-2009 reveal that this figure is likely to increase. On these provisional statistics, there were 36,479 personal insolvencies in 2009, which would represent an

11% increase on 2008 figures, and a 300% increase in the number of personal insolvencies between



1990 and 2009. See further <www.itsa.gov.au>.

2 This article draws in part on the findings of our research report on Australian personal insolvency: see

Ian Ramsay and Cameron Sim, Trends in Personal Insolvency in Australia (Research Report, Centre for Corporate Law and Securities Regulation, The University of Melbourne, 2009). The report is available online at <http://cclsr.law.unimelb.edu.au>. The report outlines the data on trends in personal insolvency. In this article, we analyse the key implications of the data.

ownership levels. Finally, we consider some implications of our findings for the role, function and importance of Australian personal insolvency laws and we also consider the connections between personal insolvency laws and broader social issues such as rising debt levels.



II AUSTRALIAN PERSONAL INSOLVENCY LAW
The Bankruptcy Act 1966 (Cth)(the Act) sets out Australian law relating to the insolvency of individuals, deceased debtors and partnerships.3 Under the Act, there are three regulated forms of personal insolvency: bankruptcies under Part IV and Part XI; debt agreements under Part IX; and Part X arrangements. Whilst bankruptcies

make up the large majority of personal insolvencies (25,970 or 79.02% in 2008), the popularity of debt agreements has risen sharply following their introduction in 1996. In 2008 there were 6,618 debt agreements, accounting for 20.14% of personal insolvencies. Personal insolvency agreements under Part X of the Act are less commonplace; in 2008, there were only 277, accounting for 0.84% of personal insolvencies. In this section we set out a summary of Australian personal insolvency

law relating to Part IV bankruptcies and Part IX debt agreements.4





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