When you can’t pay your debts: Bankruptcy and other options
What is bankruptcy?
Insolvency Act 2006, s 7; Insolvency Act 2006, Parts 2–4
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?
Insolvency Act 2006, ss 10–13, 45, 46
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 filing these with the Official Assignee.
A lender who you owe at least $1,000 to can apply to the High Court for you to be made bankrupt. The lender first must prove the debt – for example, by getting a court judgment (see “How are debts recovered through the courts?” in this chapter). The lender 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 lender will then apply to have you declared 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?
Insolvency Act 2006, ss 62, 101, 138, 147, 149, 158, 164, 194, 204, 211–212, 419–439, 433(1)(f)
As a bankrupt person, you can only keep limited assets, that is:
- essential personal and household items (including furniture, personal effects and clothing)
- tools for work
- a motor vehicle up to the value of $6,500
- money up to $1,300.
As a 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 they 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 they are also 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.