Bankruptcy is a concept that is frequently misunderstood, particularly given that in Australia it relates to the affairs of an individual as opposed to a company (noting in America the term is used for both). It can also conjure up in an uninformed individual's mind a range of emotions - many of which are incorrect. Findings from a recent and detailed study of bankruptcy in Australia present some useful information.
Importantly, as I wrote in my last article voluntary bankruptcy should always be considered as a last resort option after consideration of other possibilities have been evaluated and are deemed not viable or achievable.
Researchers at Melbourne Law School have completed a major empirical study of Australia's personal insolvency system. Specifically, the Study was conducted over three (3) years and entailed:
- Major online surveys of individuals (currently in bankruptcy, as well as those that have been discharged), financial counsellors, solicitors and members of the public;
- Focus groups; and
- Extensive analysis of data sets from the Australian Financial Security Authority ("AFSA").
Until this recent detailed Australian study, there had been few attempts to study bankruptcy (in a domestic context) and its long-term impact on an individual's finances, health, social relationships and general quality of life. As a professional, these kinds of detailed studies are important for us to better understand what are the reported views of those involved with or impacted by bankruptcy so that can seek to better understand and communicate with each individual in financial hardship and where appropriate consider legislative reform (not just in the Bankruptcy Act, but also across other government legislation).
General findings from Study:
- The surveys conducted revealed that for many Australian individuals (also referred to as debtors in this article), bankruptcy resulted in genuine improvements for financial stability, health, relationships and general well-being.
- However, the surveys also suggest that the outcome for bankruptcy can vary materially according to the underlying reasons for a debtor's financial hardship in the first instance.
The general findings are supportive of what I have written about previously, namely:
Each debtor's financial position is unique to them and needs to be carefully evaluated on the available information by a qualified professional so that right advice can be obtained. Regrettably in my experience, a number of debtor's leave getting professional advice too late and/or rely on advice from other parties that can quite often lead to incorrect decisions being made regarding the debtor's affairs.
Specific findings from Study:
- 77% reported that their ability to manage their finances had improved;
- 61% reported an improvement in their mental health;
- 57% indicated that their relationships and family life had improved since their bankruptcy;
- 55% of respondents reported that since going into bankruptcy their physical health had improved; and
- Discharged bankrupts reported more positive outcomes from bankruptcy than those currently in bankruptcy.
The last point above is perhaps not so surprising and reflects that with time, an individual is more reflective in a positive way on how bankruptcy has assisted with their financial rehabilitation.
The Study revealed that certain respondents indicated that at the time they made their decision, they did not understand the extent to which it may affect their lives. In particular, some respondents remarked:
"I should have gotten advice."
As a Registered Trustee who specialises in personal insolvency, I believe there is more that Government and the industry can do to make access to information and qualified professionals available. I will write about this in an upcoming article. However, it underscores in my view the need for individuals in financial hardship to get proper advice from a qualified professional as opposed to an unlicensed, unqualified or pre-insolvency advisor.
I provide an obligation free appointment to carefully evaluate an individual's financial position, discuss options available to them and provide a recommendation to aid them in their financial rehabilitation. At the core of this evaluation is that voluntary bankruptcy should be considered as a last resort option once other options have been evaluated and are deemed not viable or achievable.
Further to the above, the Study also suggests that access to better information, advice and on-going support would help promote the financial rehabilitation of debtors. It is this later point that is quite interesting. For example, in America and Canada debtors are required to participate in financial counselling programmes which include information about budgeting and avoiding unnecessary expenditure. Could such an initiative help debtors with financial rehabilitation in Australia? For non-business bankruptcies, I believe it quite possibly could.
Bankruptcy offers an important means of financial rehabilitation for debtors in severe financial hardship. However, it cannot always provide a fail-safe means of financial rehabilitation, particularly where unemployment and / or reliance on social security is apparent. Fundamentally, reliable income is a vital pre-requisite for financial rehabilitation, and this is an aspect considered in my discussions with debtors where I take the time to provide guidance and resources to aid the debtor (where required) in seeking to obtain a reliable income.