If financially things aren’t looking that great, you may be considering declaring bankruptcy. Making your debts go away may seem like the obvious solution, but there’s a lot to consider before you do. While bankruptcy can clear your debts from the time you lodge a debtor’s petition with the Official Assignee, it’s far from being the end of your problems.
We’re going to take a look at what declaring bankruptcy really means financially and personally, how bankruptcy works, alternatives to bankruptcy, applying for bankruptcy and what happens afterwards.
What Does Declaring Bankruptcy Mean?
When you declare bankruptcy, you are effectively saying that you are unable to repay any of your debts. This means that you are insolvent, and cannot pay any of your debts when they are due. If you have a debt of over $1000 or greater, you are eligible to apply to the Official Assignee for bankruptcy.
If you are declared as bankrupt, most of your assets can be confiscated and sold by the Official Assignee. The exceptions to this are personal belongings, tools for work, household furniture and appliances to a set value, a vehicle worth up to $6500 and cash up to $1300. The Official Assignee can shut down your business and sell its assets, sell your home, take any money you are given, cash out your term life insurance and any other savings. If you have gifted money to others within the past five years, this can be taken back. The same goes if you transferred your assets to a family trust.
Alternatives to Declaring Bankruptcy
If your debt is smaller than $47,000, you could consider a No Asset Procedure or Debt Repayment Order instead. Both of these are formal alternatives to being bankrupt:
- No Asset Procedure – best suited if you have no assets and owe between $1000-$50,000. You can only apply once, and it is a less formal situation with shorter consequences to bankruptcy. It is usually discharged after one year.
- Debt Repayment Order – if you owe less than $50,000 in unsecured debt, a Debt Repayment Order can give you extra time to repay your debts. The Official Assignee and DRO Supervisor will work out a repayment scheme you must follow. Your assets remain in your control and your name is listed on the Official Assignees website. It is discharged once the terms of your order have been completed.
Other things you can try to do to help avoid a bankruptcy include:
- Sell your assets – things such as clothing, jewellery, furniture
- Cancel any subscriptions – things such as pay-TV, newspapers and magazines
- Set a budget –identify ways you can cut costs and pay creditors
- Restructure your debt – put into one low-interest loan
- Offer creditors a final sum payment – sometimes creditors will accept a amount smaller than the total debt just to claim back something financially
The consequences of bankruptcy are quite severe, so if you can, seek other alternatives.
Consequences of Being Declared Bankrupt
Yes, once declared bankrupt, you will be released most types of debt that you listed in your application. However, there are other consequences including the seizing of all of your assets, except for the minimum as we mentioned above. Other consequences or implications include:
- Negative credit rating – this can affect your ability to borrow money or obtain credit in the future. It can also make it harder to rent a property.
- Banks may close your account or refuse you to open one.
- All of your income and expenses must be declared to the Official Assignee.
- Power, phone and insurance companies may refuse to provide services to you.
- Your employee may not want to employ you anymore based on that your bankruptcy is a risk to their business.
- Your details and related information can be seen online.
- The Official Assignee may want to sell assets you own jointly with others.
- You cannot travel overseas without the permission of the Official Assignee.
- You cannot run a business or be employed by a relative.
- You cannot take any legal action against anyone.
- If applying for credit over $1000, you must declare you are an undischarged bankrupt.
Then there are the social implications, where people treat you differently and this can cause significant difficulties.
How to Apply for Bankruptcy
You can apply for bankruptcy by completing a debtor’s application to the Official Assignee. This can be done online. When filling out a statement of affairs form, you will need to list details about your assets, cash and debts. Once the Official Assignee has declared you as being bankrupt, most of your debts will cease and creditors will not be able to contact you for repayments.
Appointed to administer the Insolvency Act 2006, the New Zealand Insolvency and Trustee Service is responsible for controlling all No Asset Procedures, Debt Repayment Orders and bankruptcies. It is then the job of the Official Assignee to collect and sell your assets to repay your creditors.
Once your application has been made, the Official Assignee will be in contact within 10 working days and ask for any necessary information. If your application is successful, your details will be published on their website, newspapers or NZ Gazette, and your creditors will be sent a report about their next steps in getting their money.
What Happens After Bankruptcy?
Once declared an undischarged bankrupt, creditors can no longer contact you and ask for money. They instead need to work with the Official Assignee. You will though, need to cancel any current direct debits you have made and seek permission from the Official Assignee if you want to go overseas, be self-employed or employed by a relative.
You remain an undischarged bankrupt for three years, but your name remains on the Official Assignee’s website for seven years, or indefinitely if this is not your first bankruptcy. Its is obviously not ideal to be declaring bankruptcy multiple times. If you have paid your debt in full or have a significant change in income and can now pay your debts, you can apply for an annulment. You can also apply for early discharge to the High Court but seek legal advice first.
Once three years have passed and you are discharged from bankruptcy, the restrictions placed on you are no longer valid. You regain control of your finances, can become self-employed and travel overseas when you wish.
It is seriously recommended that you do not wait until things get so bad financially that you have no other option than to declare bankruptcy. We recommend coming and talking with us to discuss your options, which can include budgeting, working out debt repayments, identifying assets to sell or ways of generating additional income. It would also be beneficial to look at ways to improve your financial literacy and consider taking some financial awareness coaching if you are a business owner.
If you have found yourself in a challenging financial situation, please seek advice. We’re here to help.