Bankruptcy can occur when an individual is unable to pay their debts as they become due. A debtor can make a voluntary application for bankruptcy 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.
To enter bankruptcy a debtor must have debts greater than $1,000.00.
If a debtor voluntarily submits themselves to bankruptcy, they must first file with the Official Assignee (“OA”) a statement of the debtor’s affairs in the prescribed form. It is up to the OA to decide whether the proposed bankrupt is accepted to bankruptcy.
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 $1000.00.
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.
Responsibilities and restrictions under bankruptcy
Once bankrupt, the property of the bankrupt vests in the OA. The definition of property is very wide. 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.
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; and
- A bankrupt cannot incur credit of more than $1000 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!
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. 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. In articles to follow we will detail some of these alternatives.
Sound, strategic advice is necessary to navigate the process or to navigate the alternatives to the process.
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