4. The Future: Personal Insolvency Law as a Response to Climate Change

In 2025, the problem of inadequate insurance remains an acute challenge for Australians, with direct implications for the personal insolvency system.^[1] The Chief Executive Officer of AFSA, Tim Beresford, stressed this in a speech to the Future of Banking Summit in May 2025. Mr Beresford observed that Australia is now ranked 22nd in the world for exposure to natural disaster risk; that 5% of Australian homes are already ‘uninsurable or unaffordable to insure’; and that this figure is expected to rise 10% by 2035, ‘[a]s disasters become more common and severe’.^[2] He noted that in 2024, 15% of Australian households were already under ‘extreme insurance stress’, spending more than one month’s gross income on insurance premiums each year.^[3] Mr Beresford predicted that the worsening problem of underinsurance will affect home values, access to finance and homeowners’ capacity to meet ongoing mortgage obligations, with ‘obvious flow-on effects’ for the wider economy.^[4] Recent analysis by the Australia Institute offers further evidence of this problem. It finds that, on average, a household without home and contents insurance risks losing 74.3% of its overall wealth in the event of a flood, fire or other natural disaster.^[5] The Australia Institute notes that bankruptcy is a distinct possibility for such households, particularly if a property is destroyed and the mortgage exceeds the value of the household’s remaining assets.^[6]

Because the financial impacts of a disaster vary so widely, those affected should always have the benefit of legal advice before deciding to enter personal insolvency.^[7] For some, a personal insolvency might in fact create new challenges or exacerbate existing problems. For those displaced from their homes, the legal requirement to disclose one’s status as an undischarged bankrupt could make it difficult to secure housing, particularly in a tight rental market.^[8] The decision to enter a debt agreement carries even greater risk, given that such agreements involve ongoing repayments and assume the existence of a steady income. Individuals whose employment is affected by a flood, fire or other disaster might, at first, overestimate their future capacity to make such payments. If a debt agreement fails, due to missed payments, the individual is at risk of being made bankrupt by his or her creditors. In these circumstances, the individual derives no benefit from the repayments already made and cannot claim a refund of the fees paid to the debt agreement administrator. In this sense, entering a debt agreement might only prolong or even worsen the financial harm caused by an extreme weather event.^[9]

The Australian legal system is evolving to provide more targeted assistance to victims of natural disasters. Since the ‘Black Saturday’ bushfires of 2009, in Victoria,^[10] legal aid commissions and community legal centres have developed multidisciplinary outreach services to help those affected.^[11] Financial ombudsman schemes can also assist victims, offering free dispute resolution relating to insurance claims, mortgages and other loan contracts, as well as utilities and telecommunication contracts.^[12] They are developing specialist teams and procedures to respond to floods and other extreme weather events.^[13] Specialised financial counselling is available through the National Debt Helpline and Small Business Debt Helpline, offering assistance with applications for disaster relief, insurance claims, loan variations and payment deferrals.^[14] AFSA has also developed a ‘vulnerability framework’ to improve its service provision to people in financial crisis, including those affected by disasters.^[15] These initiatives may help some individuals to avoid personal insolvency, or alternatively, to choose the personal insolvency option most suitable to their circumstances, in the aftermath of a disaster.

To date, however, there has been little discussion of how personal insolvency law might change, to offer more support to those financially affected by such events. One change recently proposed by the Commonwealth Government might achieve this, in part, though this was not one of its explicit objectives. In 2024, the government consulted on a new procedure, known as the ‘Minimal Asset Procedure’ (‘MAP’), which would offer a quicker, less complex form of bankruptcy to those with low incomes, low assets and relatively small debts.^[16] Those accessing the MAP would be eligible for discharge in one year, rather than the usual three. Their names would appear on the National Personal Insolvency Index, but only for four years, meaning that the MAP may have a less significant impact on access to credit than a traditional bankruptcy.^[17] The MAP would only be available once in an individual’s lifetime and would not be open to those who had previously declared bankruptcy.^[18]

The MAP would not be a comprehensive solution for those affected by extreme weather or disasters. It would only assist those with debts below the prescribed threshold (tentatively fixed at $50,000 in the 2024 consultation). This means it would likely be of little value to homeowners or small business owners. Moreover, at this stage, the MAP’s future is uncertain. Although it attracted support from consumer advocates, the Law Council of Australia and some private insolvency practitioners, other stakeholders expressed concern that the MAP could reward poor financial behaviour or produce unjust outcomes for creditors.^[19] If implemented, however, the MAP could benefit some of the most vulnerable individuals affected by extreme weather events, including renters and single parent households. The streamlined, simplified process would be a significant advantage for those whose financial records are destroyed in a disaster. The opportunity to achieve debt discharge within a shorter period, and with limited impact on credit reports, could facilitate faster financial recovery.^[20]