Author’s note: This article on what it’s like to going bankrupt is one of our most widely read and shared. Probably because most commentary on bankruptcy is about the maths rather than the aspect this article covers – the emotional impact. At over 2,500 words it’s a detailed blog, so, here’s a quick introductory video explaining what you’ll read about so you can decide if it’s for you or not:
For those who hadn’t lived through a downturn or perhaps hadn’t paid attention before, the Global Financial Crisis (GFC) was an eye-opener. Banks going into liquidation, companies closing down, individuals losing their homes and their livelihoods, countries going into unprecedented levels of debt. As a country, we have sidestepped the worst of the impacts.
But as individuals, we are not, and have never been, immune to going bankrupt.
In FY17, more than 30,000 Australians were declared insolvent. That’s up 3000 people in three years. (Source: Australian Financial Security Authority.) One of my direct reports was going through bankruptcy while working for me. I had absolutely no idea until she told me three months after we’d started working together. It must have taken great courage to open up that way. Because of the shame and anxiety often associated with bankruptcy, it’s not something most people talk about socially. As a result, not many people know what it’s really like going bankrupt – what happens, what do the liquidators take, how does it feel? I decided it was time to remedy that.
Fortunately, three of my friends were willing to open up and share their bankruptcy stories. Their cases are vastly different as you will see: Michael* was a student with spiralling credit card debt; Karen* was a working single mum saddled with massive mortgages thanks to her ex-husband’s refinancing; Les* was looking towards retirement when an unpaid tax debt caught up with him. I draw one resounding theme from their stories:
Life goes on.
Losing it all can be an unpleasant chapter in your life, but all three have gone on to be happy. Here are their stories.
*Note: names have been changed to protect identities.
Michael’s bankruptcy story
Michael was in my class at university. I vaguely recall that at some point while we were studying he went bankrupt. I didn’t think to ask why or what the impact was on him at the time. I was too busy partying and trying to pass my exams. He seemed fine and it didn’t appear to affect his daily activities much – he still joined us for a drink at the pub and cheap dinners on Tight Tuesdays. We were all skint, so he didn’t stick out too badly. Recently I called him to find out what had happened and what going bankrupt was like for him.
Michael was a mature-age student who had previously worked as a mechanical fitter. While working, he maxed out his credit card to its $12,000 limit. He then took another credit card with a $4,000 limit to help make the minimum payments on the first credit card. When that one filled up, Michael took out a third credit card – again with a $4,000 limit – and repeated the process. While he was working, it was no problem to make the minimum payments and he could keep things ticking over. However, full-time work and studying for an engineering degree don’t mix. After giving up full-time work, Michael found he could no longer make the repayments. The interest was increasing, and he was starting to feel the pressure. Not entirely sure what his options were, Michael sought legal advice from the free solicitors on offer at our university.
Michael credits his meeting with the university solicitor as the ‘kick in the bum’ he needed to take action. The solicitor explained the advantages of going bankrupt in Michael’s case: being more than halfway through his degree, Michael was only a couple of years away from earning a good wage. If he dropped out, it would be difficult to come back and perhaps he never would. Michael didn’t have much to lose in the financial and physical sense. He had a crappy car and some second-hand furniture to his name, none of which the liquidation teams would touch as it was below the minimum value threshold.
It was a stressful experience. Michael had to dig through his records to provide the level of detail to satisfy his creditors. There were questions and paperwork. Michael had old fines outstanding, so the government became involved. He was unable to write off $5,000 in fines for property damage and driving offences, so he agreed to pay that off at a rate of $20 per week. At the end of it though, Michael found relief. No more letters of demand, no more increasing interest. He was free!
More than a decade later, Michael is happily living with his fiancée and their children. They have investment properties and a solid income. They keep their credit card limit conservative and pay it off in full every month to avoid paying any interest. His bankruptcy no longer appears on his records. In short, he’s a changed man. Michael tells me he is very glad he elected for going bankrupt rather than drop out of universiry to earn the cash to pay off the debt. He believes he wouldn’t be where he is today without that event – he thinks he’d likely be alone, drinking and smoking his blue-collar wages away with no assets to his name. He prefers the life he’s got now, thank you very much.
Michael’s advice to anyone considering bankruptcy is to avoid it, if possible, if you have a lot of assets at stake. Going through the same experience now would be much more damaging and traumatic than it was in the uni days and waiting the seven years to have your record cleared is harder as you get older. However, if you’re in a tight spot like he was, with spiralling debt, no foreseeable way out, and you don’t have much to lose, he reckons: ‘Go for it!’
Karen’s bankruptcy story
As Michael alluded to, going bankrupt when you’re more established is traumatic. Karen found this out the hard way when she declared bankruptcy at 37 years old. Hers is an excellent cautionary tale to all people who share money, assets, and debt with their partners.
Karen and her husband, Dean, owned two properties: their own home and an investment. Dean was a mortgage broker and managed their collective funds and investments. Whenever Dean called to ask for Karen’s driver’s license number, she knew a new purchase was being made. However, whenever Karen asked what was happening, Dean responded with demands to know why she didn’t trust him. Not wanting to rock the boat, Karen let Dean continue without further questioning, even allowing him to continue managing their joint finances on the properties after their break-up. At that time, Dean was going through a very rough period. Karen agreed to give him some breathing room when he asked to delay buying her out of half of their properties. Little did she know he was redrawing on their loans to the point where they had amassed nearly a million dollars of debt.
When she found out about the redrawing, Karen got legal control of the properties and loans and put a stop to any further borrowing but by then the ‘what’s yours is mine’ rule was definitely in play. The debt was irreversible, and even though Dean was the perpetrator, she was responsible. Karen, a single mum on $55,000 a year was left to deal with a million-dollar loan. Servicing the interest on that big a loan was beyond her, and she could forget about actually touching any of the principal. She struggled along, on her own, for a very stressful year before she finally conceded defeat.
Karen’s experience in the Attorney General’s office on the day she went in to sign the bankruptcy papers was traumatic to say the least. Apparently, she bucked the norm: she was told most people in her position were relieved that it was all over. Not so for Karen. She was ashamed and distressed at what was happening. Despite her best attempts to prepare herself, she had little information about what to expect. Karen was under the misapprehension that being bankrupt meant you didn’t have to pay your debts any more. She was wrong. The liquidators took everything: the properties, her shares, the car, her cash, and her entire next paycheck. She had to go back to request they give her some of the money back, so she could pay her rent and feed herself and her daughter.
When she went to get cash out of her savings account at the ATM, it ate her card. The teller at the bank announced loudly that she had no right to a card and that now that she was bankrupt she would have to do all her banking in person in the branch. Needless to say, Karen does not bank with that institution any more (it’s one of the Big Four Banks – send me a message and I’ll tell you which one). For the next three years, her paycheck was garnished to the tune of 50%. She was unable to get car insurance on her new (second-hand) vehicle even though she’d been with the insurer and reliably paid her premiums for more than 20 years. Karen found herself being treated as a second-class citizen, and in some ways that continues today three years after the bankruptcy has concluded.
Bankruptcy has transformed Karen’s attitude to money. She has no debt and doubts she ever will again. She doesn’t have a credit card. Everything she owns is paid for in cash up front. She says the feeling of not being financially beholden to anyone is liberating. She is a prodigious saver and puts aside a significant portion of her paycheck every month, which apparently gives her quite a buzz. Karen is rightly proud of the fact that all her debtors, with the exception of the bank that held her mortgages, were paid off by the garnishing of her wages, which have steadily risen in tribute to her hard work. She is also glad that she has come away from the experience with a greater empathy for people. She finds it easier to understand how for some people, the slide toward and through bankruptcy is very slippery, that is can be a person’s undoing, and perhaps prevent their recovery.
Karen recommends getting professional advice if you are considering bankruptcy. She found information was scant but hopes this has improved since her experience. She also recommends that if you make the decision, do it quickly. The 12 months she struggled through prior to bankruptcy were stressful and, in the end, unnecessary. Karen also advises people in relationships to beware of catching an STD: Sexually Transmitted Debt (her phrase). She is adamant that you should never sign anything relating to finances unless you’re 100% happy that you understand it and are comfortable with all it entails. Even if the person you love tells you to trust them and sign, make sure you read the fine print first!
Les’ bankruptcy story
The tale of Les’ financial woes is confirmation of the saying: ‘only two things are certain: death and taxes.’ Of the two, it’s taxes Les can vouch for.
Les ran his construction business for 30 years on and off with short periods of paid work as an employee sprinkled throughout when business was slow. He always acquitted his debts, if necessary by selling assets to do so. However, in 2006 he was forced to wind up his business after a series of debtors not paying him. He sold his house and investment property to cover the debts, walking away with his tools, furniture, and car. His declarable loss was in the order of $300,000. However, he hadn’t submitted a tax return in a couple of years so that went by the wayside. Around this time, Les started getting treatment for depression.
Having avoided going bankrupt at considerable personal cost, Les took work as a project manager to meet his living costs. After a few years the work dried up, so he took time out to manage a major renovation for his then partner. By this time, the Australian Tax Office (ATO) was chasing Les for an $80,000 debt it believed they were owed. Les had managed his business via spreadsheet so he felt he was in a good position – the loss from the business should have well and truly offset that debt. However, he still had not submitted a tax return since 2004 so the ATO was not aware of this.
In 2012, Les was forced into bankruptcy. By this stage, his tax debt had escalated to $150,000 due to interest charges and he also owed money to the bank. At this point he was unemployed and had no hope of meeting the debt. Around this time, Les suffered a mental breakdown. He sold his car for $30,000, handed the money over to the ATO and entered voluntary insolvency. He still had not submitted a tax return, which turned out to be a real shame as when the accounts were finally completed later that year the ATO owed him $54,000 – as Les had suspected all along. By this time, he was already bankrupt, and all the money went back to the ATO.
Les says going bankrupt was a relief. Not having that debt hanging over his head has been the best part of bankruptcy. Another unexpected benefit related to his construction business: he can no longer be sued for any of his past work. All registered Master Builders are liable for their work for their lifetime, but bankruptcy clears this responsibility, which will make eventual retirement much less daunting. Les’ advice was to seek professional help if considering bankruptcy, ideally from a specialist tax lawyer. He feels every case is different, so it warrants getting that advice – even if it comes at a cost.
Where to from here?
There is so much to take away from the stories of Michael, Karen, and Les. I thank them for their willingness to be so candid about their experiences for our benefit. There are a few personal actions I would put in place to help avoid bankruptcy:
- Avoid escalating debt – pay off credit cards promptly and keep limits realistic. Don’t allow debt to grow beyond what you can service.
- Take accountability for your money – and never sign anything unless you fully understand it.
- Submit your tax returns on time – if only for the peace of mind that you’re not amassing any debt.
Do you have a bankruptcy story to share? We’d love to hear it, and we know from reader feedback that sharing your experience makes an impact on the lives of many. Please share your comments below.
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Lacey Filipich is the co-founder and director of Money School. She helps parents raise financially savvy kids and helps adults get on top of their finances. Connect with her on LinkedIn and follow Money School Facebook to learn more.