New Zealand bankruptcy rates declining but more improvements needed

Since 2019, the total number of applications for bankruptcy in New Zealand have decreased, as have the number of bankruptcy judgments approved by the courts. The Debtfix Crew is stoked to hear the good news, but we know our work is not yet done.

There are different thoughts about why the number of bankruptcies has decreased, mainly focused on the money distributed to businesses to minimise the fallout from Covid restrictions. Debtfix believes the Crew had a significant impact, starting out in 2018 with the aim of preventing as many bankruptcy procedures as possible and helping New Zealanders find better debt solutions.

Source: New Zealand Insolvency and Trustee Service: Monthly Bankruptcy figures.

From 2019 to 2020, there were 1101 bankruptcy applications, which reduced to 525 from 2021 to 2022. Throughout the same three years the number of bankruptcy applications made by creditors, that is, the organisations and businesses people owe money to has decreased by 76 per cent.

By comparison, the number of individuals who are struggling with debt (debtors) and apply for bankruptcy reduced by an impressive 127 per cent.

So, all good news but during the past year 346 people applied for bankruptcy. That is 346 individuals, mums, dads, siblings, grandparents, and young adults who probably thought there were no other options.

With the click of a button online they can become bankrupt and, in most cases, there is no going back.

There are many common misconceptions surrounding bankruptcy, especially the belief that it is an easy option or the only solution when debt becomes overwhelming.

Unfortunately, the financial and legal impact of bankruptcy is long lasting, and many people suffer from the stigma for years. Not all advice is the best advice, and often friends and even many professionals overlook options such as debt repayment orders (DROs) or creditors’ proposals.

These alternatives leave everybody better off, with creditors receiving higher rates of repayments from a debtor and the debtor does not bear the whakamā (shame) of bankruptcy.

Often, people erroneously believe all their debts will disappear when they go bankrupt, but this is not true. Repayments are made for three years, as with DROs and creditors’ proposals, and the person may pay the same amount to creditors, but the impact is different when they enter bankruptcy.

An individual’s credit record will include the bankruptcy for seven years and it is publicly accessible on the insolvency register. Their assets may be sold to repay the debt, including those jointly owned by the bankrupt’s partner.

For the first three years, a bankrupt must request permission before travelling overseas for work or a holiday, as well as to become a company director. For three years, people who are self-employed have all financial records monitored by the Official Assignee appointed through the New Zealand Insolvency and Trustee Service. All people entering bankruptcy are issued with a new IR number to clearly delineate their life before and after bankruptcy.

Your life is no longer your own and somebody is right in your business for three years and really, the only winner is the Official Assignee.

Occasionally, bankruptcy is the best option but the number of bankruptcies in New Zealand is declining with more appropriate use of DROs and creditors’ proposals. A DRO is feasible when the personal unsecured debt is less than $50,000 and the applicant has some ability to pay. Often, creditors support giving someone time to repay debts when there is an official plan with an appointed DRO supervisor. The payment plan agreed by the Official Assignee is notified to creditors, and managed by the DRO supervisor – leaving the debtor in relative peace.

With a creditors’ proposal, there is no limit to the level of personal debt. It is a good option when the debtor has a steady income allowing for some regular payments or assets that can be sold in a controlled way to help pay debts. It is also a great option for those who are self-employed or act as directors of small enterprises, as the proposal doesn’t restrict future trading or acting as a company director. A creditors’ proposal does not have the formal restrictions or stigma that comes with bankruptcy, and the Official Assignee is not involved.

There are debt solutions that are a win for everyone’s financial outcomes, which must be a win for New Zealand.