When you can’t pay your debts: Bankruptcy and other options

If you’re unable to repay your debts and you believe there’s no prospect of this changing, you may consider the following options as ways of dealing with your debts:

  • bankruptcy – the most serious of the options
  • the no-asset procedure – a one-off alternative process to bankruptcy
  • summary instalment order – an alternative to bankruptcy, allowing payment over time.

These three options are explained further below.

In each case the process is administered by the Official Assignee (see below, “Who is the Official Assignee?”).

Who is the Official Assignee?

The Official Assignee is part of the New Zealand Insolvency and Trustee Service. It provides debtors with information about bankruptcy and other insolvency options. If you become bankrupt, the Official Assignee acts as trustee, administering the debts you incurred up to your bankruptcy. Creditors then deal with the Official Assignee rather than the bankrupt person (you).

How do I decide which option is appropriate?

When you are considering bankruptcy or one of its alternatives, you must complete a statement of affairs and submit it to the Official Assignee. The statement of affairs requires you to set out a detailed account of your financial situation. This can now be done electronically via the Insolvency and Trustee Service website.

The Official Assignee will then use the statement of affairs to assess your situation and to provide advice and assistance about which insolvency option is the most appropriate for your circumstances.

The most appropriate option will depend on the amount of your debts, what the debts are for, the value of any assets you have, and whether you have used any of the insolvency options before.

Bankruptcy

What is bankruptcy?

Bankruptcy is a way of dealing with debts that you cannot pay. It relieves you of most of your debts, but ownership of your property transfers to the Official Assignee (see “Who is the Official Assignee?” above) and you will be subject to a number of restrictions (see “What are the disadvantages of bankruptcy?” below). The Official Assignee will sell any property you have (subject to some limitations: see “What are the disadvantages of bankruptcy?” below) and distribute any proceeds among your creditors.

How does a person become bankrupt?

If you have debts of $1,000 or more, you can apply for bankruptcy. Someone you owe more than $1,000 to can also ask the High Court to make you bankrupt.

  • You can apply by completing an application for adjudication and a statement of affairs and file these with the Official Assignee.
  • A creditor who you owe at least $1,000 to can apply to the High Court for you to be made bankrupt. The creditor first must prove the debt – for example by getting a court judgment (see “How debts are recovered through the courts” in this chapter). The creditor would then serve a bankruptcy notice on you, giving you 10 working days to pay the debt, or to apply to the High Court to set aside the bankruptcy notice. If you don’t pay within the 10 working days, you have committed “an act of bankruptcy”. The creditor will then apply to have you adjudicated bankrupt.

What are the advantages of bankruptcy?

Most of your unsecured debts, including any student loan balance, are wiped and proceedings against you to recover those debts are halted.

What are the disadvantages of bankruptcy?

As a bankrupt person you can only keep limited assets, that is:

  • essential personal and household items (including clothing)
  • tools for work
  • a motor vehicle up to the value of $5,000
  • money up to $1,000.

As bankrupt person you still have to pay certain debts – court fines, child support and debts with secured creditors. You can also be required to make periodic payments to the Official Assignee (for example out of your wages) as a contribution towards payment of your debts.

If you have transferred assets to someone else in the two years before you become bankrupt, the Official Assignee might be able to take those assets back:

  • if the transfer occurred when you were unable to pay your debts, and the recipient received more in the transfer than he or she would have received in the bankruptcy
  • if the transfer was a gift
  • if the transfer was at an undervalue (for example, you sold a car to someone and charged less than the car was worth).

As a bankrupt person you cannot get credit for more than $1,000 without first informing the credit provider that you are bankrupt.

Without first getting the permission of the Official Assignee, you cannot

  • run a business
  • be employed by a relative or an entity controlled by a relative
  • leave New Zealand.

If you break any of the rules of bankruptcy or make false statements to the Official Assignee, then you commit a criminal offence.

The names of bankrupt people are published in their local newspaper and the New Zealand Gazette, and are recorded on a public register on the Insolvency and Trustee Service website.

How long does bankruptcy last?

You are usually discharged from bankruptcy automatically after three years.

The no asset procedure

What is the no asset procedure?

The no asset procedure is an alternative to bankruptcy. The procedure gives you protection from creditors that is similar, but not identical, to the protection given to you by bankruptcy. It is a one-off opportunity for you to sort out your financial affairs and get back on your feet without entering formal bankruptcy. It usually lasts 12 months instead of the normal three year period for bankruptcy.

Who can apply for the no asset procedure?

You will be eligible to enter into the no asset procedure if you:

  • have no realisable assets (realisable assets means property you can sell to make money – it excludes a motor vehicle up to $5,000, tools for work and essential personal and household effects)
  • have never been through the no asset procedure
  • have never been bankrupt
  • have debts of between $1,000 and $40,000 (not counting your student loan)
  • cannot repay any of your debts.

You may not be eligible if:

  • you have concealed assets with the intention of defrauding creditors
  • you incurred a debt knowing you did not have the means to repay it
  • a creditor objects
  • a creditor has begun the process to put you into bankruptcy, and it is likely that the outcome for the creditor will be much better if you are made bankrupt.

How do I apply for the no asset procedure?

A debtor can apply for the no asset procedure by filing an application and a statement of affairs with the Official Assignee. This can be done online.

What are the advantages of the no asset procedure?

Most of the unsecured debts of the person are wiped. Unlike bankruptcy, this does not include a student loan.

The procedure usually lasts for a period of 12 months. By comparison, bankruptcy usually lasts for three years.

What are the disadvantages of the no asset procedure?

The debtor still has to pay certain debts – court fines, child support, student loans and debts with secured creditors.

The debtor cannot get credit for more than $1,000 without first informing the credit provider that the debtor is subject to the no asset procedure. (Between applying and becoming subject to the no asset procedure, the limit is $100.)

The names of people subject to a no asset procedure are published in their local newspaper and the New Zealand Gazette and are recorded on a public register on the Insolvency and Trustee Service website.

Summary instalment orders

What is a summary instalment order?

A summary instalment order is an order made by the Official Assignee (see above, “Who is the Official Assignee?”) that allows you to pay back the money you owe (in full, or to the extent that the court considers practicable) in regular instalments over a period of up to three years (or five years in special circumstances) without the threat of further legal action. If you have income or assets, a summary instalment order may be an alternative to bankruptcy.

When a summary instalment order is made, a supervisor is appointed to help you manage the payments due under the order.

Who can apply for a summary instalment order?

You as a debtor, or a creditor with your agreement, can apply to the Official Assignee for a summary instalment order, setting out the details of the proposed payment plan.

When can a summary instalment order be made?

The Official Assignee can make a summary instalment order if satisfied that:

  • your total unsecured debts are not more than $40,000 (not counting your student loan), and
  • you are unable to repay those debts immediately but you can pay some, or all, of them over time.

What happens if you fail to make the agreed payments?

The supervisor must notify the Official Assignee. The summary instalment order can be terminated and creditors can start, or restart, legal action to recover any outstanding debts. This may lead to bankruptcy.

What are the advantages of a summary instalment order?

There is no minimum debt requirement for a summary instalment order.

A summary instalment order helps you to manage the payment of your debts.

A summary instalment order is not advertised in newspapers or the New Zealand Gazette (although it is recorded on a public register on the Insolvency and Trustee Service website for the duration of the order and the supervisor must send notice to known creditors).

What are the disadvantages of a summary instalment order?

You cannot get credit for more than $1,000 without first informing the credit provider that you are subject to a summary instalment order.

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