Have you ever wondered what happens when you go bankrupt?  This article looks at the general process and effect of bankruptcy in New Zealand as well as the effect on a student loan.

The general process and effect of bankruptcy

The process of bankruptcy in New Zealand is set out in the Insolvency Act 2006 (‘the Act’).  The Act also provides for an additional formal alternative to bankruptcy, known as the “No Asset Procedure”.

The fact a person is living overseas does not automatically preclude them from being able to be made bankrupt under New Zealand law.

Bankruptcy

There are two ways a person can be adjudicated bankrupt – on the application of a creditor or the debtor can file for adjudication himself or herself.

In terms of the latter, if the combined debts of a debtor amount to $1,000 or more, he or she can apply to be adjudicated bankrupt.  There are certain steps which need to be followed which are set out in the Act.

Once the court makes the order of adjudication, the debtor’s bankruptcy commences.  It usually lasts three years but normally remains on a person’s credit record for up to 7 years.

The appointed Assignee will advertise the order or adjudication in the Gazette, on the Insolvency and Trustee Service and in the local newspaper.

The general effect of bankruptcy includes:

(a) Once the debtor has been adjudicated bankrupt, most of the bankrupt’s property vests in the Official Assignee, whether in or outside New Zealand, and the bankrupt’s rights in the property are extinguished. The powers that the bankrupt could have exercised in, over, or in respect of any property (whether in or outside New Zealand) for the bankrupt’s own benefit vest in the Assignee.  The Official Assignee can therefore seize and sell the bankrupt’s property.

(b) The debtor may retain certain assets, such as tools of trade and necessary household furniture. However, the bankrupt can only retain these assets up to a maximum value. The maximum value for these assets is fixed in the Assignee’s discretion. The bankrupt may also retain a motor vehicle, the value of which must not exceed $6,000.  In addition, property held in trust is not affected by the bankruptcy.

(c) The bankrupt must inform the Assignee about his or her property and provide various financial records, including disclosing any property acquired during the bankruptcy, such as a prize or an inheritance.

(d) The assignee can investigate past financial transactions and can retrieve gifts made within a certain timeframe.

(e) Unsecured creditors (secured debt is excluded from bankruptcy) are precluded from continuing to personally pursue the bankrupt for any debt included in the bankruptcy or to add penalties/interest to the debt.  All proceedings to recover any debt provable in the bankruptcy are halted.

(f) Unsecured creditors can however prove their claims against the debtor, and the Official Assignee will distribute the bankrupt’s assets among them based on these claims (if there are sufficient funds to do so) in order of a set priority.

(g) The Official Assignee will also decide whether the bankrupt needs to make regular repayments to help repay their creditors.

(h) Creditors that are not based in NZ will be sent a report if they are listed in the bankruptcy.  A bankrupt can include that debt in their bankruptcy.  A creditor may prove for any debt due to him or her from the bankrupt, no matter whether the debt is governed by New Zealand law or foreign law.   A foreigner proving for a foreign debt stands in the same position as a New Zealand creditor proving for a New Zealand debt.

(i) The bankrupt will need the Official Assignee’s permission to, inter alia:

1. take part in the management or control of any business, to be self-employed, or to be employed by a relative or a relative’s business; and

2. travel overseas (the bankrupt can return to New Zealand but if they want to leave again they will need to apply for permission).

(j) The bankrupt also needs to advise the Official Assignee if they change their name, address, employment, terms of employment or income/expenditure.

(k) The public register (of bankruptcies) can be searched from overseas. This may therefore affect a bankrupt’s credit rating outside of NZ.

No assets procedure

To be eligible for the No Asset procedure a person must have debt between $1,000 and $47,000, no realisable assets (excluding cash up to $1000, motor vehicle up to $6000, tools of trade and personal and household effects) and for whatever reason have no way to pay any of their debts.

It has the effect of preventing unsecured creditors from taking steps to enforce debts against the affected person that are included in the procedure. It does not however apply to student loans.

It lasts for 12 months although remains on one’s credit record for longer (it currently remains on the insolvency register for up to 4 years).  It does not have as many restrictions as bankruptcy but it does impact one’s credit rating.

The effect of bankruptcy on a student loan

When a person becomes bankrupt, their student loan is written off by the Inland Revenue Department.

This article is not a substitute for legal advice and you should talk to a lawyer about your specific situation. Should you need any assistance, please contact Kris Morrison at Parry Field Lawyers (348-8480) krismorrison@parryfield.com