Stealthy slide for middle-class wealth
Tempted to use the equity in your home to consolidate your debt or maybe take a holiday or buy a big screen TV? What about buying the best home you can afford? Think again: the past decade has seen bankruptcy become a middle-class “phenomenon”. Even if you aren’t stretched financially, here’s a few things to consider.Students skipping on credit card bills, the chronically poor and uber-wealthy people hiding assets may be the stereotypical bankrupts — but they are no longer typical.
A report by the University of Melbourne’s Centre for Corporate Law and Securities Regulation, analysed Australia’s bankruptcy cases for the past decade.
It pinpoints bankruptcy as a “middle-class phenomenon”, with professionals and high-income earners declaring bankruptcy like never before.
Professor Ian Ramsay, co-author of “Personal Insolvency in Australia: An Increasingly Middle-Class Phenomenon”, said personal bankruptcy filings rose steadily for 4 years, then jumped 6% in 2008-09. (The report was co-authored by Cameron Sim.)
While the 2008-09 bankruptcy total was a record 27,520 — a 34% jump on 2004-05 (20,501 cases) — last year saw a new record of 36,487 personal insolvency cases. (Personal insolvencies latter mainly involve bankruptcy, but also include debt agreements.)
Descent hastening since 1990
But it’s not a new trend. An earlier study, also by Prof Ramsay and Cameron Sim, found a 300% increase in personal insolvencies in Australia since 1990. This increase far exceeds population growth, hence, the pair says, indicates a strong middle-class presence.
Yet the news gets worse. The report did not include bankruptcy data from 2010, but Prof Ramsay said in the 9 months to 31 March this year, numbers were up slightly on the same period last year.
Prof Ramsay told ABC News, “We find things such as our excessive use of credit, particularly a challenge with home loans and skyrocketing mortgages.
“Unsurprisingly,” he added, “given economic times and economic trends, unemployment — of course — can be a major factor.”
No single factor for pain
Prof Ramsay described the phenomenon as “a social problem that has escaped notice”.
He told The Age that because the phenomenon of the middle-class bankrupt was so unheard of, Australians were largely unaware of the social costs to those affected — including tarnished credit ratings, workforce difficulties, personal relationship costs and the still-prevailing stigma attached to becoming bankrupt.
Going bankrupt … with more
Prof Ramsay described these “new” insolvents as being older, increasingly with dependants (adding financial pressure for families), being from higher-status occupations, with higher levels of personal and household income — and having rising asset and property ownership levels.
The fact that personal insolvencies rose during both good and bad economic times (good being economic expansion and low interest rates; bad being the global financial crisis), suggests the jump is not just due to economic conditions at the time.
But while there was no single factor responsible, Prof Ramsay cited unsustainable home loans as a major cause of increased middle-class bankruptcy.
Melbourne Law School figures from recent Australian Bureau of Statistics data to 2008 puts the amount of debt owed by Australian households at $1.1 trillion, a rise of almost 6-fold since 1990. Owner-occupied housing was the highest component of all household debt during this time, comprising 56-67% of total debt.
What to watch for
Many people use their home equity — whether it’s to consolidate debt or to fund their lifestyle. But using this money to spoil yourself with a “special” holiday or dream car, or splashing out on a 3D telly (no matter how much you watch it) is not a good choice.
That in no way means that you must life a life of austerity, never going anywhere special, still driving the car you bought as a student and watching a tiny colour “box”. If these things are your goals, great, go for them. But plan for them without using the equity you’ve saved in your home. While your home loan may be money at a lower interest rate, it is still debt with accumulating interest.
Another mistake people make is to buy a home that is really unaffordable. It may be “the best you can buy”, but, if you do your sums properly, is actually out of your reach. Buying something that stretches you — even a bit — is not a wise investment decision.
One of the first things you must do to avoid the slippery slope of bankruptcy pain is to know how much you earn versus how much you spend. And be accurate. Many people who slide under have no idea of these figures. You can only control what you measure, so start measuring accurately. And plan.
If you need help measuring your incomings and outgoings, call us for guidance. Summerhill also specialises in financial coaching; this is training and guiding people in dealing with and managing their finances. It’s not just about “teaching you to save”, it ensures you retain the discipline to maintain your financial strategy — and teaches you how to do it.
Sources: University of Melbourne’s Centre for Corporate Law and Securities Regulation; “Middle class hit by bankruptcies”, Daniella Miletic, The Age, 23 May 2010; Surge in middle class bankruptcy, ABC News, 24 May 2010; “Soaring middle class bankruptcy blamed on unsustainable home loans” Lending Central 30 May, 2010