The process to go bankrupt is too easy and does not allow for the debtor to explore all their options.
As part of my research I interviewed 29 people who had recently declared bankruptcy. We discussed the process. I found that at least half of the people interviewed did not have to go bankrupt.
Going bankrupt still carries great stigma in Australia. The participants in the research reported experiencing feelings of shame, embarrassment and guilt. The decision to go bankrupt should only be made after careful consideration and taking the time to weigh up all the options.
So why is the process to go bankrupt as simple as downloading forms from the official government website, completing and submitting them via email the same day without the need to have received any advice or assistance to avoid the bankruptcy?
In 2015/16 just over 17,200 Australians declared themselves bankrupt. Added to this figure were around 12,500 Australians who declared themselves insolvent and entered into an agreement with their creditors. Going bankrupt does have short-term advantages such as ceasing debt collection activity but also has many long-term consequences such as affecting certain career choices, future borrowing and even being allowed to privately rent a home.Author provided
My research found that bankruptcies are the result of many interacting factors such as peer pressure, advertising tactics, commission-driven loan selling, and relationship breakdown.
Debtors struggling to repay their debts are often not aware of sources of assistance, their rights and options such as accessing free and impartial financial counselling agencies. These could assist them to negotiate with their creditors and present a range of options such as challenging the debt, utilising financial hardship options such as a moratorium for 90 days, or using the free and independent Ombudsman services.
Despite a big investment by the Australian government in promoting these options they are not well known nor easily grasped. The forms and processes can be difficult. They are very difficult for those with additional challenges such as low levels of literacy, English as a second language, and not having access to a support network.
The act of falling behind with payments increases stress levels creating a cycle of making wrong decisions that further perpetuates debt. Against this complex maze of options and faced with ongoing contact from debt collectors, the research participants took the option of going bankrupt.
One bankrupt who participated in the research told how me how she paid A$1000 to a for profit debt management firm to help her complete the bankruptcy papers. In her emotional and stressed state of dealing with demands of debt collectors she was not aware that there was no fee to go to a financial counsellor who could have assisted her to complete the paperwork at no cost.
This participant was one of many who did not have to go bankrupt as she qualified to have her debts assessed for write off under the national hardship scheme. She did not have $1000 spare. She was advised by the debt management firm to stop paying her creditors and to direct the funds towards their firm.
This guaranteed the debts fell behind, making it harder for the debtor to change her mind. I asked her about the impact of going bankrupt. She said:
“The impact is huge with this, to the point where psychologically, you’re a bit of a mess actually. There were times there I could’ve gone close, you just take your life over it.”
The Australian government is proposing to reduce the term of bankruptcy from three years to one.The aim is to encourage entrepreneurs to take a risk without the fear of being locked out of the business and credit sector if it all goes wrong.
However only around 25% of current bankruptcies are business-related. Ordinary consumers are needlessly going bankrupt.
Reducing the term of bankruptcy does not reduce the stigma of having to actually go bankrupt. What does need to be reviewed is the system. It has few barriers to enter, is usually free and quick, but leaves lasting trauma for the participants.
Authors: Gregory Mowle, Lecturer in Finance, University of Canberra