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Bankruptcy in New Zealand: The pros, cons, and consequences

Key Takeaway

Bankruptcy in New Zealand is a formal legal process under the Insolvency Act 2006, primarily for individuals unable to pay their debts. It provides debt relief but imposes significant consequences on a person's assets, credit, and certain activities. The High Court handles bankruptcy applications, and the Official Assignee manages the bankrupt's estate. The Disputes Tribunals Act 1988 is not relevant to bankruptcy proceedings.

Bankruptcy in New Zealand: Overview

Bankruptcy is a formal legal process for individuals in New Zealand who are unable to pay their debts. Its primary purpose is to provide a mechanism for debtors to be relieved of their overwhelming financial obligations while ensuring a fair distribution of their assets among creditors [Source: Insolvency Act 2006, s 10].

Governing Legislation and Jurisdiction

Bankruptcy in New Zealand is governed by the Insolvency Act 2006. The High Court has exclusive jurisdiction over bankruptcy proceedings [Source: Insolvency Act 2006, s 13]. Applications for bankruptcy, whether by a debtor or a creditor, are filed with and adjudicated by the High Court [Source: Insolvency Act 2006, s 35, s 37].

It is important to note that the Disputes Tribunals Act 1988 establishes Disputes Tribunals to resolve minor civil disputes involving claims generally up to $30,000 [Source: Disputes Tribunals Act 1988, s 13(1), s 13(2)]. However, bankruptcy proceedings are complex legal matters involving formal declarations of insolvency and are exclusively handled by the High Court under the Insolvency Act 2006. Therefore, the Disputes Tribunals Act 1988 is not relevant to the process or jurisdiction of bankruptcy itself.

The Official Assignee

Once a person is adjudicated bankrupt, their financial affairs are managed by the Official Assignee (also referred to as the 'OA'). The Official Assignee is a statutory officer appointed under the Insolvency Act 2006, responsible for administering the estates of bankrupts and ensuring compliance with the Act [Source: Insolvency Act 2006, s 27]. All property belonging to the bankrupt immediately vests in (transfers ownership to) the Official Assignee upon adjudication [Source: Insolvency Act 2006, s 108].

The Bankruptcy Process

Bankruptcy can be initiated in two main ways:

  1. Debtor's Application (Debtor's Petition): An individual who is unable to pay their debts can apply to the High Court to be adjudicated bankrupt. This requires filing an application and a statement of affairs [Source: Insolvency Act 2006, s 35]. The debtor must provide details of their assets, liabilities, income, and expenses.
  2. Creditor's Application (Creditor's Petition): A creditor to whom a debt of $1,000 or more is owed can apply to the High Court to have a debtor adjudicated bankrupt if the debtor has committed an act of bankruptcy (e.g., failure to comply with a statutory demand) [Source: Insolvency Act 2006, s 37, s 38].

Upon a successful application, the High Court issues an order of adjudication, and the debtor is declared bankrupt [Source: Insolvency Act 2006, s 40]. The Official Assignee then takes control of the bankrupt's assets and finances.

Pros of Bankruptcy

For a debtor facing overwhelming debt, bankruptcy can offer several potential advantages:

  • Relief from Debt: Most unsecured debts (e.g., credit card debt, personal loans, hire purchase agreements) are discharged upon bankruptcy, meaning the bankrupt is no longer legally obligated to repay them [Source: Insolvency Act 2006, s 281]. This provides a fresh start financially.
  • Cessation of Creditor Action: Once bankrupt, creditors cannot pursue legal action against the individual for pre-bankruptcy debts [Source: Insolvency Act 2006, s 107]. This stops debt collection calls, letters, and court proceedings.

Cons and Consequences of Bankruptcy

Bankruptcy carries significant consequences and restrictions:

  • Loss of Assets: Most assets of the bankrupt, including property, vehicles (above a certain value), bank accounts, and investments, vest in the Official Assignee. The OA will sell these assets to repay creditors [Source: Insolvency Act 2006, s 108, s 113]. Certain essential items, such as household furniture, tools of trade, and a motor vehicle up to a specified value, may be exempt [Source: Insolvency Act 2006, s 108(3), Insolvency Regulations 2007, Schedule 1].
  • Income Contributions: The bankrupt may be required to make contributions from their income if their earnings exceed an amount necessary for reasonable living expenses [Source: Insolvency Act 2006, s 146].
  • Credit Rating Impact: Bankruptcy severely impacts a person's credit rating, making it difficult to obtain loans, credit cards, or mortgages for an extended period even after discharge.
  • Public Record: Bankruptcy is a public record, accessible through the Insolvency Register maintained by the Official Assignee.
  • Restrictions on Occupation and Roles: A bankrupt cannot:
    • Be a director or promoter of a company or be involved in its management without the High Court's permission [Source: Insolvency Act 2006, s 164].
    • Be an office holder, such as a Member of Parliament, local authority member, or justice of the peace [Source: Insolvency Act 2006, s 169].
    • Carry on a business under a name other than the name under which they were adjudicated bankrupt without disclosing their bankruptcy [Source: Insolvency Act 2006, s 168].
  • Travel Restrictions: A bankrupt must seek permission from the Official Assignee to leave New Zealand [Source: Insolvency Act 2006, s 167].
  • Duration: Bankruptcy generally lasts for three years from the date of adjudication, after which the bankrupt is automatically discharged [Source: Insolvency Act 2006, s 275]. The Official Assignee may, in some circumstances, apply to the High Court to extend the period of bankruptcy for non-compliance with duties [Source: Insolvency Act 2006, s 275(4)].

Costs of Bankruptcy

Applying for bankruptcy, whether by a debtor or a creditor, involves filing fees payable to the High Court. The current fees are set out in the Insolvency Regulations 2007 [Source: Insolvency Act 2006, s 441; Insolvency Regulations 2007]. These fees are subject to change and are usually published on the Ministry of Justice website.

What to Expect During Bankruptcy

Upon being adjudicated bankrupt, an individual must cooperate fully with the Official Assignee. This includes attending interviews, providing financial information, and surrendering any non-exempt assets [Source: Insolvency Act 2006, s 156]. The Official Assignee will investigate the bankrupt's financial affairs, sell assets, collect income contributions, and distribute funds to creditors. The bankrupt will be restricted from managing businesses, borrowing substantial sums, and undertaking certain activities without permission.

Discharge from Bankruptcy

Most bankrupts are automatically discharged after three years from the date of their adjudication, provided there are no unresolved issues or outstanding duties [Source: Insolvency Act 2006, s 275]. Once discharged, a person is generally released from their pre-bankruptcy debts (with some exceptions, such as court fines or student loans) and the restrictions of bankruptcy are lifted [Source: Insolvency Act 2006, s 281]. It is also possible for the Official Assignee or the High Court to discharge a bankrupt earlier in certain circumstances [Source: Insolvency Act 2006, s 276, s 277]. Bankruptcy can also be annulled if it is shown that the adjudication should not have been made or if debts are paid in full [Source: Insolvency Act 2006, s 309].

When to Seek Independent Legal Advice

Navigating bankruptcy is a complex legal process with serious and long-lasting implications. Individuals considering bankruptcy, facing a creditor's application, or seeking to understand the specific consequences for their situation, should consult with a lawyer specialising in insolvency law or contact their local Community Law Centre for free legal assistance. The Official Assignee provides information but cannot offer legal advice.

Key Resources