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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4 Responses

  1. I agree Michael, another relevant article indeed. What would be helpful is knowing who we, as trustees can contact and what services are available. It is more snd more common to see bi-polar suffers as well as those suffering various forms of mental incapacity or illness and there is no universally known way to get them assistance when we as unqualified persons suspect a problem.

  2. Congratulations Michael for highlighting an issue I have long held to be at the core of a successful insolvency practitioner. In fact people grieve for the loss of their business . A knowledge of the Kubler – Ross stages of grieving should me a mandatory part of IP initial and ongoing CPE. Austin

  3. Issues related to impacts of financial trauma are very much in need of focus in the competency training of those working in the banking, insurance and finance sector and related legal services. I am victim of white collar crime and chair of HNAB-AG ( a group run by victims for victims providing emotional support, practical assistance in dealing with lenders, liquidators, so-called ‘hardship programs’ and others, lobbying parliamentarians, contributing to senate inquiries and related reviews). I am also a seasoned former trauma counsellor (relinquished to focus on WCC and financial trauma). I am in a unique position to understand the serious impacts on mental health. Particular aspects of mental distress result when a person is forced into bankruptcy or losses their home, life-savings, retirement, investments and/or endures placement in overwhelming misconduct-related debt occurs through no fault of their own, but at the hands of unscrupulous industry members. The wide-ranging impact is immense extending to all aspects of life. Thwarted or denied insurance claims also creates or compounds mental health suffering. Lack of avenues for fair, swift and proper restitution (for direct and indirect losses) and compensation (for incalculable financial and other losses, as well as pain and suffering) clearly exacerbates impacts. Victims in Australia learn these crime pay. There is little, if any, accountability held of offenders or appropriate penalties, deterrents and safeguards applied. Victims do not get a “fair go.” Taking on the industry is not possible emotionally or financially for almost all. Few are financially sophisticated enough to know where to begin. Most are consumed with surviving the shock and the often protracted aftermath. Deep pockets of offenders, capacity for extraordinary corporate spin and inadequate response of power structures crushes and silences victims. Anyone can be rendered powerless: the mental health impacts of anxiety, depression, insomnia, grief and despair can be profoundly debilitating. Training on this topic is currently being designed. I am also working on a book about the unrecognized, hidden impacts of financial trauma, white collar crime and Australia’s treatment of these forgotten people. I very much appreciate this article and applaud efforts to raise awareness and expectations of related practitioners to be competently and sensitively trained in this regard, however the financial trauma comes about. Certain individuals in the industry have provided me with immeasurable kindness, helpful information and generous assistance over the past 8 years of my personal onerous ordeal. Thank you to all who do what you can to make a meaningful difference to help people traumatized in relation to finances.

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