Mental health and bankruptcy

The account of the bankruptcy of Sir Garfield Barwick and the personal impact that it had on him is a reminder of the need for trustees in bankruptcy to have some education or training to ensure they are at least aware of manifestations of poor mental health, and how to deal with that in the legal context. Many trustees may well have that knowledge and training, but there is a lack of professional focus given to it.  

Mental health and debt, and bankruptcy

There are various overseas studies on the connection between mental health and financial stress and loss. As one example, Oxford University research showed a significant morbidity impact of the GFC post 2008. Of the major World Bank Report on the Insolvency of Natural Persons 2013, Professor Rosalind Mason of QUT comments on the fact that

“unmanageable debt burdens cause a host of serious psychic, and ultimately physical, problems for debtors. Empirical studies have documented widespread and profound debtor suffering from the fear and anxiety produced by constant worry about inability to repay debts, as well as nagging feelings of failure. Constant anxiety arising from inability to pay or from harassment by creditors can cause serious emotional and other problems for debtors, including depression and social withdrawal. Ironically, overwhelming debt burdens might cause debtors to be unable to concentrate on work and other responsibilities, thus preventing debtors from responsibly managing their own financial distress and plunging debtors into a descending spiral of failure. This situation of hopelessness can sap not only the debtor’s motivation to engage in productive work, but also the debtor’s essential joy or even desire for living”.  Families and children of distressed debtors also suffer.

That Report says that the introduction of a personal insolvency regime was prompted in one jurisdiction largely in response to medical evidence of a high incidence of physical ailments directly linked to the counterproductive operation of the country’s debt collection system.

The connections

Mental illness in itself can precipitate a person’s bankruptcy and can arise or be compounded by financial stress, and then going bankrupt. The present three year period of stigma and restrictions does not help. 

While bankruptcy trustees cannot be medical assessors or advisers, they should have some understanding of the mental state of the bankrupt, and not, for example, make too ready a judgment of lack of co-operation.  Even absent mental health, the trustee is dealing with a range of personalities, backgrounds and cultural attitudes.  Mental illness can also be an issue in perceived vexatious conduct. 

As anecdotal examples, a depressed person may suffer unemployment or fail to manage their liabilities, leading to bankruptcy by default. Types of mental illness can lead to excessive spending or irresponsible gift giving. Other circumstances of how the debt arose can come from mental illness.  The debtor may in fact be solvent but by inaction may be made bankrupt. 

On becoming bankrupt, a trustee may be confronted with a person with mental health issues which impact on the person’s ability or willingness to respond to their legal responsibilities and trustee requirements.  A perceived lack of cooperation may mask other issues. 

The responsibility of a trustee should not however extend too far.  The high point of expected intervention was in Owners of Strata Plan 58041 v Temelkovski [2014] FCCA 2962, where the trustee was criticised for not recognising the poor mental state of the bankrupt and arranging a litigation guardian.  How far that responsibility goes is problematic.  But at least ensuring that a bankrupt person has some family or external assistance or advice is a minimum task. Simply assuming that the bankrupt is capable can lead to undue cost to the estate through continual demands but unproductive responses.

Going bankrupt

How a person might go bankrupt and thereby seek relief from mental pressure is also problematic.  Ancient and unreformed provisions such as that found in section 16(1)(q) of the NSW Trustee and Guardian Act 2009 allowing the Public Trustee to “sequestrate the estate under the bankruptcy laws”, do not assist.

On the other hand, a bankruptcy can be annulled because of mental illness in that ‘voluntary’ bankruptcy requires a capacity to form the requisite intent: Trouton v Official Receiver in Bankruptcy [2014] FCCA 2345.  But someone with an enduring power of attorney on behalf of a person who is or becomes mentally ill or incapacitated cannot cause that person to go voluntarily bankrupt:  Orix Australia Corporation Limited v McCormick [2005] FCA 1032.

Education and training

The training of insolvency practitioners in mental health generally appears to be lacking.  Accounting and business qualifications do not cover it.  Lawyers should have more of an appreciation either through their legal or other studies, or in dealing with issues of client capacity or personal injury in their work.  The law’s long-time respect for the rights of those who are mentally ill is another factor.

It is not an aspect of the qualifications and experience of trustees or liquidators under the changes brought in by the Insolvency Law Reform Act 2016.  Professional training in mental health should be available, with a focus on the particular issues and tensions that arise for a trustee both in seeking to have bankrupts cooperate and comply with their obligations, and at the same time in assessing whether capacity to do so is an issue.  

But while the need for this type of training has been discussed for some time, its progress is poor.   Individual practitioners might usefully pursue their own training and studies.  In that respect, professional training in mental health should be recognized in the 40 hours of CPD that practitioners are now required to undertake annually under the new insolvency laws.    


This is a work in progress, and comments are welcome.

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