Debt collectors are bankrupting Australians over small $5000 credit card debts

For Kim Forrest and her husband, money has always been tight, but they have managed and, until recently, believed they were on track for retirement.

Key points:

  • People can end up being bankrupted over debts as small as $5,000
  • Consumer advocates are alarmed by the number of clients with small debts taken to court by Lion Finance
  • Last financial year Lion Finance filed 512 bankruptcy cases, just shy of the 543 filed by the ATO

The Forrests had a mortgage and several other debts, but it was a $9,600 credit card debt that threatened to undo it all.

In March, Ms Forrest said she received letters from organisations offering to assist the couple with their bankruptcy.

The word “bankruptcy” was news to her.

“I just rang them and I said, ‘What’s going on? What’s this bankruptcy about?’,” she said.

“And they said, ‘well you’d better ring Lion Finance’.”

Ms Forrest learned the couple’s only asset, their home, could be put in the hands of a trustee unless they came up with thousands of dollars in 21 days.

Kim and Steven Forrest, now 55, have been together since they were teenagers.

They raised their five children in public housing just outside Newcastle while Ms Forrest worked as a chef and her husband drove trucks.

“We’ve never had any money. We’re happy without money because we’ve got each other. It’s never, ever about money,” she said.

They survived the collapse of their small transport business in the late 90s and bought their modest home when they were in their 40s.

“This was our very first home. It’s just amazing this house, we love it, it’s home,” Ms Forrest said.

About five years ago, they bought a bed and a washing machine using a credit card with an interest-free period.

They continued using the card for several years. When the interest-free period expired, Ms Forrest said they began paying an interest rate of nearly 30 per cent.

When she was injured and forced to drop out of the workforce, managing their finances became a struggle.

Along with their mortgage, there were bills and other ongoing direct debits, including their car finance. They were churning through the one wage they had coming in.

“It’s very, very tough. I mean we had two wages coming in for years,” Ms Forrest said.

“Now it’s just Steven, he’s the sole breadwinner which is pretty hard.”

As they battled to keep up, their repayments to the credit card debt became irregular and eventually stopped.

In May 2018, the credit card company sold the debt to collector Lion Finance — a common practice in the banking sector.

Debt collectors pay less than the debt is worth for the chance to chase down the entire sum, while the bank gets part of the loan paid out rather than writing off the full amount or waiting years to recoup payments.

Once the debt collector took over the couple’s debt, Ms Forrest re-commenced repayments at $50 a week.

But in September 2018, Lion Finance, owned by the publicly listed Collection House Limited, took the first step in the legal process to recover the debt.

In court, the debt collector claimed Steven owed more than $11,000.

Australians can be bankrupted over small debts

In Australia, an individual can be sued for bankruptcy for an unpaid debt of as little as $5,000.

Last year, consumer advocates became increasingly alarmed by the number of clients being taken to court over relatively small debts by one company in particular — Lion Finance.

They decided to do some research, analysing court lists over the past four years. Their data, released exclusively to the ABC, backed up their suspicions.