COVID-19 Economics: Financial gurus bracing for a 'tsunami' of bankruptcies in 2021
Forecasts show a wave of businesses could be facing bankruptcy once the government's support packages run dry in 12 months time.
Australia could face a "tsunami" of bankruptcies when government support packages and existing capital run dry as a result of COVID-19, a lead financial institution has warned.
Malcolm Howell, bankruptcy trustee and partner at insolvency firm Jirsch Sutherland, forecasts that the majority of these bankruptcies will come in 12 to 18 months time thanks to a delay in the economic impact of coronavirus.
The most at risk, says Howell, are small-business owners who have been forced to use personal finances to prop up their businesses during mandatory shutdowns.
"Once the government relief measures expire, many SMEs that have deferred their liabilities are likely to receive a severe capital hit six or more months down the track and might not be able to meet their obligations," Mr Howell said.
"And given a lot of small-business owners often use personal finances for business borrowings – including using their homes as a guarantee – they are more vulnerable."
Mr Howell said signs of an easing house market will put a further dent in the pocket of struggling businesses who hope to use personal assets to offset business debts.
"Any business that has used personal finances for business borrowings is at risk," he said.
"As property prices fall, there is reduced levels of equity with which to finance or prop up a business."
The spike of these insolvencies has been forecast to come in the middle of 2021, after businesses have used the "breathing space" offered to them by the government.
Financial experts are urging businesses who forecast wearing the hit of COVID-19 in a year's time to seek financial advice before it's too late.
"Seek advice early and talk to your accountant or insolvency specialist," advises Mr Howell. "The relaxed insolvency laws mean you have six months to decide what the best solution is.
"Temporary changes to the insolvency rules will buy people time to seek advice and work on the best solutions available, but we are bracing for a wave of personal insolvencies next year."
Importantly, Mr Howell pointed out that many business owners feel shame or fear in declaring bankruptcy even if it is the result of something out of their control like coronavirus.
"Bankruptcy is a result of circumstances and sometimes it's the only way to recover and to maintain your mental health and wellbeing and that of your family," says Mr Howell.
"Financial pressures affect everybody in the family, not just the individual concerned."
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