There is no doubt that bankruptcy is never a position you expect to find yourself in. However, declaring bankruptcy is more common than one may think. In the wake of COVID -19, rising living costs, inflation and the devastation from natural events the prevalence of bankruptcy is more visible in the community, even though rates of bankruptcy are not as high as they once were.
The number of individuals who declared bankruptcy for the period of July 2021 to June 2022 was 528 in comparison with the figures from July 2016 to June 2017 where 1873 individuals were declared bankrupt.
Besides the clear decrease in number of bankruptcies occurring, the main difference between declaring yourself bankrupt in is the prevalence of conversations about insolvency and bankruptcy in general. New Zealanders are having to declare bankruptcy at no fault of their own, but rather as a victim of the circumstances of our current economic climate.
This article aims to inform you on what bankruptcy is, and what you need to be aware of if you are faced with debts which you are not able to manage.
Bankruptcy can occur when an individual is unable to pay their debts as they become due. If you are unable to pay your debts as they fall due you are insolvent. The typical length of a bankruptcy is three years from the date upon which you file your statement of affairs with the Official Assignee (OA) but can be extended in certain circumstances.
A person who owes debts can make a voluntary application for bankruptcy. This process is relatively easy and does not require legal representation. An ordinary layperson can make themselves bankrupt or can wait until a creditor adjudicates them bankrupt via the prescribed process at the High Court.
However, bankruptcy should not be viewed as an easy way out of paying debts as it can have significant and potentially long lasting consequences for the bankrupt. It is also important to note that bankruptcy does not wipe all of your debts, court ordered fines, orders of compensation for creditors and child support fees will be still viewed as due and owing by you.
Bankruptcy removes the control over your assets. You will no longer be able to live your life as your normally would, and are bound by a number of duties and restrictions which we will discuss in this article.
To enter bankruptcy a debtor must have debts greater than $1,000.00.
An application can be made on the insolvency.govt.nz website, a response by the OA should be received within 10 working days of making the application. It is up to the OA to decide whether the proposed bankrupt is accepted to bankruptcy.
It is also important to consider whether bankruptcy is the best option for a voluntary insolvency procedure. If you have not been made bankrupt before, have no assets of value and have debts of under $50,000.00 no assets procedure may be a more favourable option.
A creditor may also make an application to the High Court seeking that the debtor be adjudicated bankrupt.
The debtor must have committed an act of bankruptcy within the last 3 months before the filing of the application and the debt must be a liquidated sum of more than $1,000.00.
An act of bankruptcy is central to the creditor’s application. It must show an act of personal default by the debtor. There are 12 separate acts of bankruptcy, but the most common act alleged by a creditor is failure to comply with a bankruptcy notice.
Once the creditor makes an application there will be a hearing. the debtor does not have to attend the hearing. If they do not attend it is very likely the Judge will adjudicate the debtor bankrupt.
Responsibilities and restrictions under bankruptcy
When a debtor is made bankrupt they must first file a statement of the debtor’s affairs in the prescribed form. It is important this form is returned to the OA as the period of 3 years for bankruptcy does not begin until the statement of affairs is returned to the OA.
Once bankrupt, the property of the bankrupt vests in the OA. The definition of property is very wide in the Insolvency Act 2006. It might include any interests in trusts that can be defined as property. It may also include any interests in property (such as a 50% claim against the property of a spouse/de facto partner). Income earnt between the time of commencement of bankruptcy and discharge is also included as acquired property, so any income earnt by the bankrupt vests in the OA.
However, in most bankruptcies if the income is modest the OA will not take any steps as bankrupts have a right to retain earnings that are necessary to maintain themselves, their spouse and family to a reasonable standard. This includes necessary tools for trade, necessary household furniture and effects, motor vehicle worth up to $6,000.00 and in most cases, Kiwisaver funds.
The OA is entitled to look at transactions you have made in the years before your bankruptcy. These transactions can be deemed a voidable transaction, which is payment or transaction made whilst you were about to be made insolvent. The OA can reverse these transactions, therefore if you are considering going bankrupt disposing of assets is not recommended.
If a sole business owner is made bankrupt, there are serious consequences. The OA may shut down the business and any assets will be sold to pay creditors.
Other restrictions on the bankrupt include:
- A bankrupt is unable to be a director of a limited liability company;
- A bankrupt cannot incur credit of more than $1,000 without making the creditor aware that the bankrupt is bankrupt;
- A bankrupt must not prevent, attempt to prevent or hamper the OA dealing with any property or assets;
- A bankrupt must notify the OA whenever they change their name, address, employment or income/expenditure;
- A bankrupt must not leave the country without consent of the OA;
- A bankrupt cannot be employed by a relative or take part in the management or control of any business without consent of the OA; and
- A bankrupt is prevented from employment in numerous professions such as auctioneers, officer of a charitable entity, motor vehicle trader and so on.
In some communities, professions or circles, bankruptcy has a negative stigma attached to it. However, many individuals are adjudicated or volunteer themselves to bankruptcy and it does not necessarily have the same stigma attached as it once did. Life can continue beyond bankruptcy, and it does for many individuals in New Zealand
Being chased by creditors can be a substantial burden. Bankruptcy can be a good way to end that stress. However, the implications of bankruptcy can be long lasting in some cases and is not always a suitable solution. A debtor is considered bankrupt for a term of 3 years upon admission to this scheme and details of this are on the Insolvency Register for the entire term plus 4 years after discharge. In some cases, this term can be extended if the circumstances warrant an extension.
In many cases, there are alternatives to bankruptcy for debtors in financial turmoil. We have published a number of these articles on our website and encourage you to read these or book in for a consultation with us if you would like to discuss your options.
Sound, strategic advice is necessary to navigate the process or to navigate the alternatives to the process.
Before applying for bankruptcy, it is important to ensure you are fully informed of the process and the effect it will have on you and your day-to-day life.
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