Bankruptcy and mental ill health

Justice John Logan of the Federal Court has raised some interesting issues in an otherwise straightforward bankruptcy judgment concerning the court’s ability to organise mental health assistance for a bankrupt – a single mother “in a spiralling situation of debt” and “in quite some despair”.

LL was made bankrupt by the Federal Circuit Court on 29 March 2023.  The petitioning creditor was the strata plan of her home unit, for a judgment debt of over $10,000 in respect of unpaid strata levies, which, with costs and more, now stood at over $30,000. She did not file her statement of affairs and her bankruptcy trustees sought orders under s 146 BA to pay a dividend regardless.  The Judge readily made the orders sought but then went on to inquire as to the circumstances of LL.

Justice Logan said that LL probably

“has found herself in a spiralling situation of debt with respect to her residential unit. Indeed, I suspect that, from the evidence, she is in quite some despair. The evidence discloses that she is a single mother. It also discloses that, when she was served with papers concerning the present application, she became quite emotional, and understandably so, if my suspicion is correct, with the process server”.

While her strata unit was worth over $700,000 and she had bank funds of $140,000, the Judge thought that LL was not “coping with her present financial situation”.

As to what to do, Justice Logan pondered the fact that the separation of powers as between legislative, judicial and executive branches of government

“ought not extend to a compartmentalisation to the point where one branch of government operates to the complete exclusion of others, where evidence discloses that other branches of government may be able to assist a person”.

Wide powers are given to courts in bankruptcy by s 30 of the Bankruptcy Act, and under the Court’s own legislation that enable action to be taken.

“To adopt an overly compartmentalised approach may have, in the circumstances of this case, not just unfortunate, but perhaps tragic, consequences”.

Given that the evidence disclosed that LL had expressed suicidal thoughts, Justice Logan considered that it was

“overwhelmingly in the interests of justice that the Court, by a direction to the registrar, bring to the attention of other branches of government [LL’s] circumstances as revealed by the evidence”.

He noted that she lived in the federal electorate of Bennelong and that there may be a range of federal welfare support services which could assist her.  There may also be state welfare support services that could be provided to her via the NSW Department of Communities and Justice.

The Judge directed the registrar to send a copy of his orders and judgment to the Federal Member for Bennelong, and to the Secretary, Department of Communities and Justice, NSW.

He also referred his reasons to the federal Attorney-General for law reform consideration, if any, where evidence in a bankruptcy proceeding reveals that there may be a need for a referral to ensure the health and welfare of a bankrupt or their family.


There can be mental illness issues surrounding a bankruptcy, and from varying perspectives.

For example, a person’s depression and inattention to financial demands can lead to their bankruptcy; and financial loss and bankruptcy can lead to depression.  At the same time, bankruptcy can provide a beneficial release from financial pressure.

In the case law, depression has been pleaded as a reason to annul a bankruptcy: Kostov (Bankrupt) v AFSA [2020] FCA 1105; as has schizophrenia: Burnett v Browne (No 3) [2021] FCA 703.

The responsibility of the trustee for the bankrupt’s mental welfare has also been raised, including as to the appointment of a litigation guardian: The Owners of Strata Plan 58041 v Temelkovski [2014] FCCA 2962.

Those with characteristics of litigious paranoia (associated with vexatious litigation) can pursue excessive remedies in response to some perceived injustice that can lead to their bankruptcy, with the trustee then becoming subject to claims: Responding to unreasonably persistent litigants (; also, Debt and Mental Health: The Role of Psychiatrists (2007) 13(3) Advances in Psychiatric Treatment 194-202, Fitch et al.

From the person’s perspective, it is difficult for others to initiate a mentally infirm person’s bankruptcy; see “Can the Official Receiver Accept a Debtor’s Petition Presented on Behalf of Mentally Incapacitated Debtors?” A Robertson (2021) 29(4) Insol LJ 218; though some State laws allow administrators appointed to look after the affairs of mentally infirm or cognitively impaired persons to make those persons voluntarily bankrupt: see SAL and JGL [2016] WASAT 63 and orders made under the Guardianship and Administration Act 1990 (WA). See also NSW Trustee and Guardian Act 2009 (NSW), s 16.

Lawyers and creditors have responsibilities. A woman was personally served with a creditor’s petition when she was, to the knowledge of the creditor’s solicitor, an involuntary patient in a psychiatric hospital. She was not present, nor was she represented, when the creditor’s petition came on for hearing and the sequestration order made: Owners of Strata Plan No 23007 v Cross [2006] FCA 900(2006) 153 FCR 398.

There is also the need to support those in business. See Mental health | ASBFEO.

Organisations like Justice Connect also provide much assistance: You searched for bankruptcy – Justice Connect.

AFSA and ASIC provide mental health support contacts: Mental Health Support Guide.pdf (

And, I have covered mental health from various angles on this website, for example:

Trustee “entirely blameless” in his dealings with a mentally infirm bankrupt – Murrays Legal

A guide for those dealing with clients experiencing mental health and financial stress – Murrays Legal

Mental health and bankruptcy – Murrays Legal


Given the value of her unit, and her bank funds, Justice Logan raised a query as to whether LL was in fact solvent.  However, s 146 was the only matter before the court and solvency was only relevant in that an order may be made under s 146 notwithstanding that it appears that the bankrupt may be solvent: In the matter of Stubberfield [1999] FCA 1862.

Apart from other assistance, it is hoped that LL can receive advice on her legal options.

Meagher and Cronan (Trustees), in the matter of Laguzza (Bankrupt) v Laguzza [2024] FCA 314



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2 Responses

    1. One caveat on this topic is that I don’t think the bankruptcy system or the trustee or the court can take on the personal difficulties of the bankrupt beyond having regard to them.
      As Keay’s Insolvency says, as paraphrased, while insolvency can come into operation at times of crisis, it does not offer a solution or redress or a panacea for all wrongs or misfortunes.

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