What does a bankrupt person look like? Is it a corporate highflyer who has recklessly thrown money into a high-risk, undiversified investment portfolio in an attempt to get rich quick, or perhaps, an aspiring entrepreneur who is shamelessly hiding assets from creditors?
Contrary to existing stereotypes, statistics say that a bankrupt is most likely a slightly below average income worker that has spiralled into debt (mostly of the credit card variety) in an attempt to sustain normal household living standards.
Gregory Mowle of the University of Canberra, says that 90-95 percent of insolvents in Australia fall under this latter description; and that current approaches to lending and financial hardship remediation, fuelled by negative stereotypes surrounding debtors, are likely perpetuating the problem.
Just this week an ASIC report revealed that one in six Australian consumers is currently overwhelmed with credit card debt; with the national unpaid balance now totalling $45 billion. But despite these stereotype-busting statistics, debtors are often still blamed.
“There is this common belief that people with large credit card debts are reckless, financially illiterate and irresponsible”, says Gregory. “This belief is dangerous because it removes accountability and a sense of moral obligation from the lender”.
Gregory also believes that there tends to be an overemphasis on legal compliance rather than ethics in the financial services sector and that conflicts of interest may cause ethics to be further overlooked.
“A common financial hardship scenario is for a debtor to be out of permanent work, relying only on a casual wage, and temporarily unable to make repayments”, says Gregory. “In this instance the most appropriate strategy would be to freeze their loans and delay or reduce repayments. The trouble is, frontline lending workers are not incentivized to do this; only to offer debt consolidation to reach loan targets”.
“There is an inherent conflict of interest. The worker has targets to hit and a mortgage to pay him/herself. What results is a debtor that has gone from having 3-4 small to medium size debts to a single large debt – simply transferring the problem, not solving it”.
Gregory, whose background is in financial counselling for Lifeline, highlights recent Royal Commission proceedings, in which Aboriginal people were allegedly targeted and irresponsibly sold funeral insurance; and urges credit providers to obey their moral sentiments as well as the law when dealing with consumers.
“People rarely declare bankruptcy because they are looking for an easy way out. The vast majority of people who file for bankruptcy have an enormous sense of shame and regret about doing so, but don’t see any other viable option”.
Gregory Mowle will address credit providers at the 28th Annual Credit Law Conference – 5-7 September, Sofitel Gold Coast Broadbeach and offer his recommendations on how the sector can effectively balance legal, moral and financial obligations.