Go for broke - insolvency can be the best solution
Snowballing debts and no means to repay them ... going bankrupt is the last-ditch option for those in a financial hole too deep to climb out from.
But what happens next for the thousands of Australians who take this option each year? Some high-profile down-and-outs, such as former childcare mogul Eddy Groves, who was declared bankrupt in January, head overseas for a new start or are cushioned by their partner’s cash. For others, it can be a painful return to the starting blocks and a hard slog back to solvency.
Graham Doessel, the founder of credit repair agency MyCRA, is marking 10 years since his discharge from bankruptcy.
His promotions business in Hervey Bay, Queensland, went under in 2000, a year after he discovered a former associate had siphoned off $135,000, including funds borrowed for expansion.
Doessel says he found out the business was in trouble when he arrived at his office to find the locks had been changed. He spent a year trying to return to the black before accepting that bankruptcy was the only way forward.
While in some senses a relief after a year of desperate ducking and weaving – ‘‘weeks and months of robbing Peter to pay Paul’’ – Doessel says getting his head around what had happened took at least a year.
Rather than seek white-collar work, he bought a pressure washer and began cleaning driveways for $50 apiece in an effort to put food on the table.
‘‘I was struggling to raise a family ... I went through a period of depression – life really sucked,’’ Doessel says.
The repossession of his car compounded his woes. Before it was taken, ‘‘that power pole looked so inviting’’, he says.
‘‘It’s not even in my personality to think like that – it’s very out of character.’’ Living without access to credit was an ongoing challenge, as was the embarrassment of being known as bankrupt in a small town, the latter so much so that Doessel moved his family to Brisbane for a fresh start.
There were 22,163 bankruptcies in 2011-12, according to the Insolvency and Trustee Service Australia, the federal agency that administers the sector.
NSW topped the list with 7627 bankrupts, followed by Queensland with 6251, Victoria with 4249 and Western Australia with 1567. Men comprised 57 per cent of the total in 2011. Typically they were single with no dependants.
Forty-seven per cent of bankrupts were unemployed at the time of becoming insolvent and 78 per cent earned less than $50,000 in the previous 12 months. About one-third had between $20,000 and $50,000 of unsecured debts and most did not own property or other assets that could be sold to repay creditors.
Unemployment or loss of income was cited as the cause in 34 per cent of cases, followed by excessive use of credit facilities, including losses on repossessions, high interest payments and pressure selling, at 22 per cent.
Accountant and financial adviser Steve Enticott says fear of long-term consequences and stigma deters many Australians from going bankrupt, when, for some, it’s their best option.
‘‘I see people locking down, thinking it’s a stain for the rest of their lives,’’ Enticott says.
Some struggle with the notion of having the financial equivalent of a scarlet letter against their name for seven years. Bankruptcy generally lasts three years but details remain on credit reference databases for an additional four.
Employment prospects can also be affected. Bankrupts are allowed to work but are restricted from some industries and barred from operating licensed businesses.
Others fear it will affect their relationship prospects or be a dirty little secret to be outed when a new partner suggests buying a place together or applying for joint credit. But for many, concern about the repercussions is outweighed by relief.
Debbie Hannaway, a manager with Moneycare, the Salvation Army’s financial counselling service, says clients considering bankruptcy have generally been down for months. Seventy-five per cent suffer from depression and anxiety, which is ameliorated once they eventually file the papers.
‘‘The relief is instantaneous,’’ Hannaway says. For Michael McCarthy, 39, it’s meant respite from financial pressure that heightened the difficulty of coping with a personal tragedy.
Life for McCarthy, now a carer for his mother, began to fall apart in 2010 when his long-term partner died of a heart attack.
He was left grief stricken, unable to return to the bottle shop where the pair had worked together and struggling to meet monthly repayments of $1200 on a car they had bought jointly under finance six months earlier.
The car was repossessed and auctioned, leaving McCarthy $40,000 in debt; a sum impossible to repay on his weekly income of about $450. He declared bankruptcy in mid-2011, shortly after attempting suicide.
‘‘Nothing went my way,’’ McCarthy says.
‘‘I’d given up on everyone and everything.’’ Bankruptcy felt like ‘‘the cheat’s way out’’.
‘‘I didn’t want to do it but was just left with no other choice,’’ he says.
Enticott says focusing on rebuilding is the best way for bankrupts to move forward.
‘‘You’ve got to be really positive about it,’’ he says.
‘‘You need to have a vision and a plan, not go, ‘Woe is me, woe is me.’
‘‘You’re bankrupt, it’s a First World problem ... life can continue on.’’
Bankruptcy – howdo you do it?
Individuals declaring bankruptcy must lodge a Debtor’s Petition and a Statement of Affairs with the Insolvency and Trustee Service Australia (ITSA). Applicants can choose a registered trustee to administer their affairs or use the Official Trustee.
Trustees sell the bankrupt’s assets to repay creditors, collect contributions from their income, and investigate their affairs to recover assets transferred to others.
Most of the information provided to ITSA becomes publicly available. Some personal details — name, address, date of birth and occupation — along with details of the bankruptcy administration are recorded permanently on the National Personal Insolvency Index (NPII). Credit-rating organisations have access to the NPII and being listed can affect applications for credit.
Bankruptcy applications can be rejected by ITSA if it thinks the debts can be repaid in a reasonable time and the applicant has been bankrupt previously or is generally unwilling to pay creditors.
InvestSMART FORUM: Come and meet the team
We're loading up the van and going on tour from April to June, with events on the NSW central & north coast, the QLD mid-north coast and in Perth, Adelaide, Melbourne, Sydney and Canberra. Come and meet the team and take home simple strategies that you can use to build an investment portfolio to weather any storm. Book your spot here.
Want access to our latest research and new buy ideas?
Start a free 15 day trial and gain access to our research, recommendations and market-beating model portfolios.Sign up for free