Personal Insolvency of Individuals
Personal Insolvency can be a struggle to pay all debts in full. This can occur for a variety of reasons.
An inability to pay debts can result in bankruptcy. However, there are also alternatives.
We assist our clients to navigate personal insolvency and to determine whether bankruptcy is the correct procedure or whether an alternative will result in the best outcome for all concerned.
At Norling Law we have expert bankruptcy lawyers who offer a FREE 30-minute Legal Consultation where we can discuss the issues and we can add some strategic value. After the discussion, we can decide whether we can help you and at what cost.
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 lastingconsequences for the bankrupt.
Voluntary Application for Bankruptcy
To enter bankruptcy a debtor must have debts greater than $1,000.00.
The debtor must file an application with the Official Assignee.
Creditor application for Bankruptcy
A creditor may also make an application to the High Court seeking that the debtor is 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. Interests in trusts may be considered property. If the bankrupt has an interest inproperty (such as a 50% claim against the property of a spouse/de facto partner), this may also be recovered.
Income earnt between the time of commencement of bankruptcy and discharge will be managed and possibly part provided to creditors.
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.
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.
Alternative to Bankruptcy – Summary Instalment Order
A Summary Instalment Order provides another alternative to a debtor who does not have the means to immediately repay debts, but that can show they have enough in their budget to make regular repayments.
The debtors application is made to the Official Assignee. If successful in the application, the debtor is permitted to repay debts over a period of time and to the extent that the Assignee considers practicable in the circumstances. This can be very beneficial to a debtor as it is a relatively quick and easy process to obtain an order which relieves pressure and does not incur the level of costs that are typical in other processes.
Alternative to Bankruptcy – No Asset Procedure
If a debtor is unable to repay its debts and believes there is no prospect of this changing, the No Asset Procedure provides an alternative to bankruptcy as a one-off opportunity to sort out the debtor’s financial affairs without a formal bankruptcy.
A successful application will give a debtor protection from creditors.
Once a debtor is admitted to the No Asset Procedure, creditors are prevented from beginning or continuing any steps to recover a debt owed by the debtor.
Upon discharge from the scheme, the debts that existed on entry into the No Asset Procedure are cancelled, the debtor is no longer liable to repay any part of those debts including any penalties or interest that may have accrued. However, debts incurred by fraud are not discharged nor is any debt for which the debtor has obtained forbearance through fraud.
Alternative to bankruptcy: Compositions and Proposals
Debtors may enter into an arrangement with creditors.
In the event that a debtor can put in place a composition, the arrangement will be binding on all creditors. Including dissenting creditors. The composition must be accepted by the prescribed majority (currently three quarters) of creditors and approved by the court, then a debtor is entitled to have their bankruptcy annulled. This process requires the debtor to formulate a scheme that offers creditors more than what they would receive in a formal bankruptcy.
Proposals have a similar process as to compositions. However, a proposal occurs prior to adjudication and essentially provides that if a proposal is brought about and approved, unsecured creditors cannot pursue a formal bankruptcy process against the debtor. The difference between proposals and compositions is that under a proposal the debtor is able to avoid bankruptcy completely and the procedure is much less complex.
These procedures enable a debtor to either avoid bankruptcy or to be removed from the process by formal compromise with creditors. There may be advantages to creditors as in some cases they may receive more than they otherwise would in a bankruptcy.
The creditors are not in any way required to accept either procedure so it is at the wider pool of creditors’ discretion as to whether or not either process will be successful.
More Information for Bankruptcy and Alternatives for Insolvent Individuals
We assist clients throughout New Zealand to navigate this process correctly. There are many pitfalls if implemented incorrectly.
Please refer to our People for more information on who we are, our experience and how we can help you.
We have offices on the North Shore in Auckland, New Zealand or can have the consultation by phone.