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As the world’s financial difficulties continue, more New Zealanders are struggling to meet their financial obligations. For some, these challenges can be managed through careful budgeting and prudent spending. For others, the situation is more serious. If you are struggling to meet your financial obligations you need to carefully consider your financial position and the legal options available to you. The purpose of this article is to outline some of these legal options.

If you are struggling to meet your financial obligations the first step you need to take is to review your finances to determine whether you are legally insolvent. You should check all invoices, statements and contracts which establish your debt and asset position. Your accountant or the Insolvency and Trustee Service forming part of the Ministry of Economic Development can assist you with this process.

You are legally insolvent if:

• you cannot pay your debts as they fall due; or
• the value of your debts exceeds the value of your assets.

If you are insolvent, your legal options include:

• applying for bankruptcy;
• entering a compromise with your creditors;
• applying to the Official Assignee for a Summary Instalment Order; or
• applying for administration under the no asset procedure contained in the Insolvency Act 2006.

This article reviews each of these options.

Bankruptcy

The purpose of bankruptcy is to provide people who cannot pay their debts with an opportunity to make a fresh start. Bankruptcy is a legal procedure dating back to the European city states in the Middle Ages. In New Zealand bankruptcy is governed by the Insolvency Act 2006.

If you are insolvent, you can file for bankruptcy with the Insolvency and Trustee Service. Alternatively, your creditors can apply to the court to have you declared bankrupt. A court hearing will then be held to determine whether you are insolvent. If you do not meet the court’s requirements (which generally require payment of the creditor’s debt within a certain time frame) you can be declared bankrupt. This can occur even if you refuse or fail to attend the relevant court hearings.

If you are declared bankrupt an officer from the Insolvency and Trustee Service, known as an ‘Official Assignee’, will be appointed to take control of your assets. You will remain in bankruptcy for a period of three years (although this period can be extended in some circumstances). Once you have been declared bankrupt, your creditors will no longer be able to recover from you the debt owed to them. However, while you are bankrupt, your assets and income will belong to the Official Assignee and may be used to pay your creditors. You will not be able to use your assets or income without the Official Assignee’s permission.

The Official Assignee will allow you to retain:

• necessary tools of trade;
• necessary household furniture and personal effects;
• a motor vehicle (provided that it is worth less than $5,000); and
• cash up to a maximum of $1,000.

The Official Assignee is able to sell all of your other assets to meet your outstanding debts.

Although you can earn an income while you are bankrupt you will need to complete a budget to show the Official Assignee how much of that income you need to cover your living expenses. If you are in a relationship, the Official Assignee can take into account any income earned by your partner. The Official Assignee will then decide how much of your income you can keep. If your income is more than you need to cover your day-to-day living expenses you will need to pay some of your income to your creditors. If your income changes during your bankruptcy, you must notify the Official Assignee.

During your bankruptcy, you must:

• co-operate fully with the Official Assignee;
• provide the Official Assignee with a full statement of your financial affairs;
• advise the Official Assignee if you change your name, address, employment status, income or expenditure;
• make payments towards your debts; and
in some cases, leave your land and buildings.

Furthermore, you cannot:

• withhold information;
• obtain credit for or borrow more than $1,000 without disclosing you are bankrupt;
• leave New Zealand without the Official Assignee’s consent;
• be involved in the management or control of any business without the Official Assignee’s consent; or
• be employed, directly or indirectly, by any relative without the Official Assignee’s consent.

You can be fined or face imprisonment if you do not comply with these obligations.

At the end of your bankruptcy, you will be discharged from any obligation to repay the debts you incurred before bankruptcy. However, you remain liable for:

• fines;
• court ordered reparation;
• maintenance and child support payments;
• amounts owing to WINZ; and
• any debts you incurred after you became bankrupt.

The opportunity to make a fresh start through bankruptcy comes at a significant cost. You will lose control of your assets and income for a number of years and the bankruptcy is a matter of public record affecting your future prospects. Before considering bankruptcy you should look at all of the other options available to you.

Compromise with creditors

One way to avoid bankruptcy is to discuss your situation with creditors and negotiate payment arrangements. If you can agree terms for the repayment of your debts you may avoid bankruptcy. Your creditors may agree to accept a lesser amount than they are owed in full and final settlement. Such an arrangement, referred to as a ‘compromise with creditors’:

• can help you to avoid bankruptcy;
• provides your creditors with an enforceable repayment plan; and
• saves costs and avoids delays for you and for your creditors.

A compromise with creditors can be a purely private arrangement between you and your creditors. The Insolvency and Trustee Service does not need to be involved if all of your creditors agree to your proposals. Consequently, these arrangements do not become a matter of public record. However, you will need to ensure that all of your creditors agree to your compromise proposals. Any creditors that do not agree could take legal action to place you into bankruptcy.

If you enter a private compromise with creditors it is important to clearly record the terms of the compromise and for you to comply with those terms. Your creditors can still apply to the court for your bankruptcy if you fail to comply. We therefore recommend that you speak with your lawyer to document the compromise agreement appropriately. If you cannot reach a private compromise agreement with all of your creditors, you may be able to obtain a formal compromise agreement under Part 5 of the Insolvency Act.

This establishes a complicated procedure for avoiding bankruptcy with the agreement of at least 50% of your creditors provided that those creditors are also owed at least 75% of your total debt. As this procedure is reasonably complicated you should seek professional advice from your lawyer if you want to pursue this option.

Summary instalment orders

If your debts are reasonably modest another option available to you is to apply to the Insolvency and Trustee Service for a summary instalment order (‘SIO’). Your creditors can also apply for this order.

You can only apply for an SIO if:

• your total unsecured debts (excluding fines, reparation orders and student loans) are less than $40,000; and
• you are unable to pay those debts immediately.

Under an SIO you are obliged to repay some (if not all) of your outstanding debts within three to five years, generally by way of instalment payments. You can negotiate with your creditors how much you will pay and once the SIO has been entered your creditors cannot take further action against you unless you fail to follow the terms of the order.

An SIO is therefore similar to bankruptcy in that it is a formal arrangement, is administered by the Insolvency and Trustee Service and prevents your creditors from taking further action against you. However, it is preferable to bankruptcy because you do not lose control of your assets.

The no asset procedure

Another option available to you is to apply to the Official Assignee for administration under the no asset procedure provided for in the Insolvency Act. This procedure provides an alternative to bankruptcy. It is similar to bankruptcy but:

• the procedure only lasts for one year (whereas a bankruptcy generally lasts for three years);
• you can only make use of the procedure once; and
• there are significant limits on who can use the procedure.

If you want to use the no asset procedure you must:

• have total debts of less than $40,000;
• not have used the no asset procedure before;
• not have been declared bankrupt before;
• have no realisable assets (excluding cash up to $1,000, a motor vehicle worth less than $5,000, personal and household effects and tools of trade); and
• prove that you are unable to repay these debts.

Even if you can meet these strict requirements the Official Assignee can still reject your application if:

• your creditors object;
• bankruptcy proceedings have already been initiated and your creditors are likely to obtain a better result through those proceedings;
• you incurred debts knowing that you would be unable to pay them; or
• you commit an act that would be an offence under the Insolvency Act if you were bankrupt.

Given these significant limits, the no asset procedure is not available to many people facing insolvency. If you want your debts to be administered through the no asset procedure, you will need to carefully consider whether you meet the strict criteria before applying to the Official Assignee.

Conclusion

As the world’s financial woes continue, more New Zealanders are struggling to pay their debts or finding that their debts exceed their assets. If this is the case for you, consider the legal options available and proactively address your financial difficulties. Seek financial and legal advice as soon as insolvency becomes a possibility for you. If you do so there are options available for managing your way out of financial difficulty that are less onerous and of shorter-term effect than bankruptcy. But if you fail to seek advice and take active steps yourself, you may lose control of your assets when creditors give up waiting and take action themselves.

© Harkness Henry

Email:matthew.peploe@harkness.co.nz

Website:www.harkness.co.nz