What’s it like to go bankrupt? Three personal stories

Author’s note: This article on what it’s like to go bankrupt is one of our most popular – probably because most commentary on bankruptcy is about the maths rather than the aspect this article covers, the emotional impacts – but at over 2,500 words it’s a detailed blog. So, here’s a quick introductory video to what you’ll read about in this blog so you can decide if it’s for you or not:

Now, onto the blog…

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: these were the stories we’ve been reading and hearing about since 2007. In Australia, we have sidestepped the worst of the impacts. But we as individuals are not, and have never been, immune to losing it all.

In FY14, more than 29,000 Australians were declared insolvent. (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 to go bankrupt – what happens, what do the liquidators take, how does it feel. I thought 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 spiraling 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.

 Bankruptcy 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 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 drinking 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 happened and what going bankrupt was like for him…

Michael was a mature-age student who has 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 spiraling upwards and he was starting to feel under pressure. Not entirely sure what his options were, Michael sought legal advice from the free solicitors on offer at our university.

Plastic money: sometimes the temptation is too great to resist

Plastic money: sometimes the temptation is too great to resist

Michael credits his meeting with the uni 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 his name – a crappy car and some second-hand furniture, none of which the liquidation teams would touch as it was below the minimum value threshold. So, he didn’t have much to lose in the financial and physical sense.

It was a stressful experience. Michael had to dig through his records in a lot of detail to satisfy his creditors. There were lots of questions and papers to fill out. There were some 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 spiraling 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 to go bankrupt rather than drop out of uni 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 you can 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 spiraling debt and no foreseeable way out – and you don’t have much to lose, he reckons: ‘Go for it!’

Karen’s 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 second 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 as if she didn’t trust him, asking: ‘Don’t you believe I have our best interests at heart?’ 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 in his life and Karen agreed to cut him some slack by letting him get the cash together to buy out her half of the 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 ‘what’s yours is mine’ was definitely true. The debt was irreversible, and she had to take responsibility for it even though Dean was the perpetrator. Now a single mum on around $55,000 a year, servicing the interest on a million dollar loan was beyond her, let alone paying off any principle. She struggled along 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 extremely 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, 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 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!

It was painful at first, but Karen plans NEVER to have a credit card again

It was painful at first, but Karen plans NEVER to have a credit card again

Les’ 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 bankruptcy 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.

As for Les’ financial habits: he tells me nothing much has changed. He still hasn’t submitted his FY14 tax return (due 31 October) so that seems to be true!

Time is all it takes to tip the needle from 'in debt' to 'bankrupt'

Time is all it takes to tip the needle from ‘in debt’ to ‘bankrupt’

What’s next?

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 will put in place to help avoid bankruptcy:

  1. Avoid escalating debt – pay off credit cards promptly and keep limits realistic. Don’t allow debt to grow beyond what I can service.
  2. Take accountability for my money – and never sign anything unless I fully understand it.
  3. Submit my tax returns on time – if only for the peace of mind that I’m 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.

We teach adults how to get on top of their finances so they can stop work sooner and stop losing sleep over money. Part of that is, of course, teaching them how to get into the situations you’ve just read about in the first place. If that sounds good to you, check out our course on Achieving Financial Independence.

You may also like to check out our Facebook page, where we share articles and video tips. Given you’re reading about bankruptcy, you may be interested in reading our tips on credit cards, avoiding the Struggle Street trap, and some wonderful free and cheap financial education resources you can access, including people to talk to for advice.

For those in debt and not quite at the stage of bankruptcy, we also have a free course called ‘Get out of debt fast’. You’ll find it on our homepage.

14 replies
  1. Di
    Di says:

    My husband & I rented out our home and set off to work in the mining boom 11 years ago with a goal to set our retirement up to purchase 5 investment properties in 5 years. Aged in our early 50’s we joined an “property investment group” costing around $10,000 all up purchasing 2 units in a remote but booming mining town. We then purchased another unit in the Brisbane CBD so within 5 years we had 4 properties including our own home. The full time positions we both enjoyed ended around the mining downturn so we gained contracting work which looked to be at least 5-6 years ongoing employment. We had equipment in storage so just purchased a couple of large vehicles & a truck and with contract in hand we purchased a cute 3.5 acres in a small township but new prestigious estate where we were to build a small cottage to live in. Towards the end of the first phase of our contact, meterage price was slashed 30% and we were told we could renegotiate for the next phase but that would be 3 months away. To keep everything going we started other work with a different company to try and keep the crew we’d built together. This proved to be a nightmare and after completing all this companies “to hard for anyone else to do jobs” we ran out of cashflow. Chasing the money owing us proved fruitless as shortly after this company went into solvency and we were never paid. We sold all our equipment, went to live with my mum and found local, low paying jobs. We put everything we owned on the market and sold our home & CBD unit. The bank took the profit from that sale and put it on the 3.5 acres loan (same bank). We paid out all $ owing to another bank which left us with the 2 remote units (which remained tenanted at a lower rate but neutrally geared paying interest only), and kept up payments on the 3.5 acres at interest only. I lost my job (another huge story) and hubby kept working on a part time on call basis wherever he could (he’s now in NZ), but both his knees needed replacement so he worked in constant pain (still is). The NZ project is due for completion end of Mar 17 and the Real Estate contacted us regarding repairs to one units bathroom which is not covered by any of our insurances (quoted for $7,000-$8,000). The long term company (tenant) moved out so the extra mortgage is payable out of my husbands wage which is at limit already. We owe approx $5,000 on credit card; we’re trying to sell a ute and I’m trying to start a homebased business so I can also care for my mum in her home as she has early stage dementia. We have sold everything that we can, most of our furniture except for our bed, dressing table etc but realise with the unit bathroom repairs, the mortgages and outlook for new work due to hubbies knees and my just starting up a home business, our options are looking more like bankruptcy than anything else. The shame, fear & anxiety of the unknown (how we’ll survive financially), emotions and depression over wrong decisions and “how on earth did we allow ourselves to get here at this late stage in our lives” (now hitting 60)! We’re not sure what to do other than read, seek legal advise (which we have done before but felt we could get through it ourselves with hard work and determination); but health, age and circumstances beyond our control are hitting us right now. With mum in her 80’s she has left 3/4 of her house to me when she passes. We had hoped we could stay in the house and or purchase it should she need to go into a home so we could bring her for weekends. There are so many ‘if’s” to be considered it’s overwhelming. We are both Directors of our Company and our SMSF (Self Managed Super Fund), plus hold Power of Attorney to both our mums (fathers not living). Our taxation for 15/16 is currently with the agent and 16/17 docs are up to date ready for submission end of June. Does anyone have any insight for us especially what we can really expect ‘life” to look like afterwards plus what we should be doing right now to prepare for the inevitable. Thank you for your help. Our story above is a VERY abbreviated one but provides the basic situation personally and financially now owing $445,000 from 2.5 years ago owing approx $1.1m from selling off assets and paying down loans.

    • Lacey
      Lacey says:

      Hi Di, thanks for sharing your story. It’s fabulous that you’ve gotten your debt down so significantly in 2.5 years. Re: your question about what to expect. I had a chat with Les from the story above (now 66yo, came out of bankruptcy recently). Not owning his own home, he is living with his partner as he can’t afford to rent his own place, maintain a car and feed himself on the pension and housing allowance. He has had trouble getting work since a contract ended in December 2015, so it seems unlikely he’ll be in a position to buy his own home now. He has very little superannuation, so it looks like the pension will be all he has for the foreseeable future. Emotionally, he’s quite happy – he loves his girlfriend, he’s spending time with his grandkids, and learning that good things don’t necessarily require money. I hope that gives you some hope. I’m not sure where you’re based, but perhaps you could talk to a free service about what your options are – for example, http://cclswa.org.au/ or https://www.humanservices.gov.au/customer/services/financial-information-service.

  2. Elizabeta
    Elizabeta says:

    Di that’s a distressing story. It looked like you were making all the right moves to ensure your financial future. Unfortunately I know someone who’s also looking down the barrel of bankruptcy, that’s how I ended up finding this article. One of the things I read about bankruptcy is that if you inherit money (or win the lottery) within the 3 years of the bankruptcy period, the trustee assigned to you can take that inheritance to pay your debts. If either of your parents die in that period of time, you could lose your inheritance. Something to think about before taking that step.

    • J
      J says:

      This is correct. I lost my father in April and mother in December same year, and my inheritance all went to AFSA, who have advised me they are not only taking the $66,000 I owed, but a $4000 administration fee as well as another fee which is 20% of the $66,000 I owed. How the hell they justify these fees is beyond me. The Public Trustee didn’t even bother advising me my mothers estate was finalised and $89,000 + had been paid to AFSA. I only found that out when I received paperwork AFSA want completed and called Public Trustee to find out when I could tell them I was expecting to receive that money. AFSA has had it for well over 6 months, all $89,000 of it and done nothing. Not only have I had to endure the circumstances leading up to my having to declare bankruptcy, I wasted $20,000 of my Superannuation trying to keep the banks at bay, finally succumbed mentally, emotionally, materialistically and financially to bankruptcy, lost both parents within eight months, shown nothing but callous disrespect from both Public Trustee and AFSA, I have now been told the $89,000 ‘probably won’t be enough to discharge me and that had I simply made an agreement with my creditors rather than declaring bankruptcy my inheritance would have been untouchable’. I am now in such a fragile state I can barely function. I have no advice to give. I am so broken from my experience I can see no recovery from here. I’m single, 50+ and face the rest of my life with no sense of security or hope. Bankruptcy is indeed a big step, and is not one I would recommend.

  3. Jan Farlane
    Jan Farlane says:

    Unfortunately all money is a scam. All of it. Creation, Lending and Bankruptcy. It’s complicated, brutal and bullshit.

    • Lacey
      Lacey says:

      It certainly can seem that way. You’ve reminded me of a quote:
      “The chief value of money lies in the fact that one lives in a world in which it is overestimated.”
      Henry. Louis. Mencken (1880 – 1956)

  4. Henry
    Henry says:

    At nearly 49yrs old, I’m staring at the barrel of Bankruptcy. Separated from my wife, with debts that are more than what I earn, health issues that I will probably carry for the rest of my life. Tried to cut deals with banks, some where really good, some absolutely a-holes but I know, is my fault. I really want to stop going into bankruptcy but if I don’t, in the long run im not going to achieve anything. I can barely make minimum repayments, won’t be able to save money, look after my daughter, etc, etc and at 60yrs old who knows, still paying the same bills. So I came online looking for bankruptcy stories and came across this website, maybe to find the cojones I need to go through with it (Bankruptcy) Great site and I have liked the Facebook page

    • Lacey
      Lacey says:

      Thanks for sharing your story Henry. That’s a tough choice, but I can say that both Michael and Les are both glad they did it and that it was over and done with – perhaps that’s some comfort. As you said, maybe better to get it dealt with than to be in the same situation in a decade. Glad to hear the article helped, and I wish you the best of luck with the process. If you think of any other money-related topics you’d like to read about, please let me know 🙂 Cheers, Lacey

  5. Carla
    Carla says:

    I’m facing bankruptcy at the moment and for only $20,000 debt. It seems like such a small amount compared to what others have lost but it is more than I can afford to repay.

    I don’t own a home, an expensive car or any investments so I have been told ‘you have nothing to lose’… Still I’ve put off signing the papers as I understand the consequences.

    One is, as a sole trader I must either let every client know I am a bankrupt or change the business name so that my full name is included in it. Well that’s just a bit awkward really. I quite like the name I originally came up with..

    But that fact alone, having to tell clients makes me feel like I have committed a crime and therefore I have to warn them first.

    I really want to avoid bankruptcy however it seems I have no choice, I am not on benefits so I can’t access superannuation. Withdrawing $10,000 of my super would have enabled me to pay off $13,500 of my debt, I negotiated a settlement (knocked nearly 50% off one $10000 bill) but nope. No can do.

    That’s crazy isn’t it? I have enough super to pay this entire debt and avoid all of the adverse affects of bankruptcy? yet I can’t get my hands on that money.

    It’s also worth mentioning that you must pay a $150 fee to apply for permission to leave the country after bankruptcyj. Now I don’t have the money to go travelling but i intend making some changes, first up I’m moving to a cheaper, smaller rental property. I hope to get a job soon so that I will be able to save enough to take my children somewhere as a treat for missing out over the last few years while I struggled as a single mother. At least that’s my long term goal, get a job, save and enjoy life.

    I’m not happy about going bankrupt, I’m 46 and probably won’t ever be able to buy a home as I won’t be eligible for finance for quite a few years from now. The bright side is, I will be able to answer my phone without fear, I will be able to take my children out to dinner once in a while and some day soon, hopefully I’ll be able to take them overseas or at least interstate for a proper holiday.

    It will be a relief to be debt free. Not sure how I’ll go with my business name though, but you can be certain I will change it. I’d much rather do that than tell every potential client that I’m a bankrupt. Not (just) because I am ashamed but because I think people will assume I am not trustworthy, that I’m guilty of fraud, or that I can not be relied upon. Maybe I’m just paranoid?

    • Lacey
      Lacey says:

      Thanks for sharing your story Carla, it’s a courageous thing to do. I agree, $20k seems such a small amount in the scheme of life, doesn’t it – especially when others go bankrupt for millions of dollars of debt. No doubt some people will judge you. But a person who had four businesses file for bankruptcy has become the President of the United States of America. It’s happened to so many successful people that I don’t think it carries the same stigma it used to. Your aim of enjoying life is awesome, and I hope that once your bankruptcy is concluded you’ll feel that you’re on that path.


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