PIPA cautioned that proposed changes to Australia’s bankruptcy and insolvency laws would allow borrowers to walk away from their debts without consequences after just 12 months, leaving working Australians facing lost wages and increased interest rates on credit cards.
The current default bankruptcy period is three years.
PIPA director Ben Paris said these proposed changes were dangerous as they positioned bankruptcy as the easy escape route for anyone facing debt and financial stress.
"The federal government is essentially incentivising people into insolvency," he said.
"Given the high number of Australians in financial stress, these changes will lead to an explosion in the number of consumer-related bankruptcies.
"But even more worrying is the fact that everyday working Australians that will be left footing the bill for this bankruptcy flood as banks recoup their losses through even higher interest rates on credit cards and personal loans.
"With figures showing almost two million Australians already have multiple negative listings on their credit histories, the pool of potential bankruptcies is enormous. Currently only 25,000 people file for bankruptcy each year, but if bankruptcy becomes little more than a 12-month hiatus the numbers will skyrocket."
The proposed changes are part of the National Innovation and Science Agenda, aimed at encouraging entrepreneurship by making it easier for individuals to bounce back from a business collapse but, according to Mr Paris, only 17 per cent of bankruptcies in Australia are business-related, so the law change would fail to achieve this goal.
"However, Australia is experiencing a problem with 'phoenixing', where businesses deliberately don’t pay their debts and then file for bankruptcy, and these law changes would encourage this practice further," he said.
"It's estimated that up to $3.19 billion is lost each year through 'phoenixing', particularly in industries where subcontracting is common, such as construction. Sadly this means working Australians simply lose their wages as while employees’ entitlements are protected, subcontractors’ entitlements are not."
The government is taking submissions on its Improving Bankruptcy and Insolvency Laws Proposals Paper.