Is bankruptcy a life and death issue?

I was startled to be reminded of a regular question in the well-known US General Social Survey whether contemplating or going bankrupt was something that might prompt a person to take their own life.  I would like to think not, indeed bankruptcy has a positive protective and cleansing effect such as to try to avoid such a negative impact. Nevertheless, the fact of the question indicates there is much written concerning the psychological impact of unmanageable debt and how or whether bankruptcy assists or hinders. 

As one example, the 2013 World Bank Report said that “unmanageable debt burdens cause a host of serious psychic, and ultimately physical, problems for debtors” referring to “nagging feelings of failure”, depression and social withdrawal.

Bankruptcy and mental health

The background to this is that I am preparing for a presentation on bankruptcy and mental health, and I have necessarily needed to check on the current law in Australia and any proposed changes, as well as reviewing recent literature and policy papers.

Broadly, the current aims are to have bankruptcy apply as a means whereby such unmanageable debt can be legally managed, involving the handing over of existing assets and providing proper accountability but beyond that without having too much further impact.  Or, as one group has said,

“the relief of the pressure of the debts will only be positive if the stress and consequences of bankruptcy are less onerous than the consequences of not going bankrupt”.

And it should be comprehensive – all debt should be discharged, business and personal, in particular in these COVID-19 impacted times.  At least these should be the aims.

Australia’s aims

Australia’s aims are not so clear in the continuation of its rather severe approach. That is consistent with its history, one aspect of which is that the colony of Victoria was one of the last jurisdictions in the world to do away with debtors’ prisons, and even then only belatedly in response to the case of a young woman who was injured in a boiler explosion in a factory where she worked and who could not then afford the consequent medical bills, so she went to jail.

She could have gone bankrupt but her debtor’s prison probably offered a more lenient outcome.  Then as now Australia has if not physical incarceration then virtual prison or parole for 3 years with labelling and reporting.  Nowadays the injured woman would find that while bankruptcy will relieve her of her medical liabilities, but she will be financially and socially monitored, just in case she has not learnt from her experience.

Likewise, in small business, the young tourism operator – builder – baker – mechanic – dentist – insolvency practitioner – whose business has been severely impacted by COVID-19 leading to their bankruptcy will also have their long period of time-out to contemplate their position.

Bankruptcy provides a range of legal outcomes – the best of a bad lot.  At a personal level, it should have a beneficial impact on a person’s psyche if the focus is on relieving the pressure of unpaid debt; but if the labelling, and reporting, and restrictions imposed are undue, beyond being consistent with proper accountability, then the benefits are less evident and the process can be counterproductive, and costly.

How the law and the insolvency courts address a debtor’s mental state consistent with the interests of creditors, and how the debtors themselves fare, will be the subject of my presentation. For the lawyers and trustees, latest case law is to be covered.

Late comments welcome.

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3 Responses

  1. South Australia was occasionally imprisoning people for debt into the 1980s – it was mentioned in one of the ALRC reports; not sure which. Presumably the principle was that people should keep their promises and settle their debts; or invoke the protection of bankruptcy.

  2. It has been my experience as a trustee that the stress and distress of individuals coming in for advice is clearly evident. When I see most of those that enter into bankruptcy 3 months later they look many years younger, refreshed and happier. The invisible burden is lifted and they come to realise life is worth living. It is not uncommon for many to say “I wish I had done it earlier”.

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