Pay Off Your Debt

Bankruptcy should be your last resort.  It is administered by the High Court under the Insolvency Act 1967 and offers you legal protection from your creditors. Although it is a last resort, it is one that may be the only option for you to get control of your financial situation if you are deeply in debt.

The first step is to determine whether bankruptcy is the appropriate option for you. When making this decision, it may be helpful to discuss your situation with a professional, such as a lawyer, your budget advisor, accountant or other financial advisor who can explain your choices to you, including bankruptcy.  They should be able to help you decide whether any of the formal and informal alternatives set out above are appropriate for you. 

The Insolvency and Trustee Service [www.insolvency.govt.nz], a government agency maybe be able to assist you.  It can provide you with information on your rights, obligations and options but cannot give you advice on how to solve your debt problems.  There is also information about bankruptcy available from the Consumers’ Institute.

You should remember that bankruptcy is a very serious legal result. It, like the alternative solutions, does not allow you to get out of your debt problems "scott free". Every solution to your financial problems will have associated benefits, costs and new obligations and limits being placed on you. 

If you wish to bankrupt yourself you may file a debtor’s petition in the High Court. On filing such a petition an Official Assignee will be appointed and will effectively take control of your income and assets. You are allowed to keep a small amount of cash, as well as any “tools of the trade” that you need to work (up to a certain value) and limited household effects. 

You should also be aware that if you do not pay your debts, your creditors may file a petition to bankrupt you.   You will have an opportunity to present your case before the Court makes its decision.  If a creditor files a bankruptcy petition, you should contact a lawyer immediately.

You may be able to avoid bankruptcy by entering into a private arrangement with your creditors.  Although these arrangements are binding legal contracts, you do not need to involve the courts. For example, such an arrangement might allow you to repay part of your debt in full settlement of the amount you owe. It is important to remember that these are privately negotiated agreements and will be legally binding on you.  Negotiating a debt reduction settlement may be an alternative to filing for bankruptcy, applying for a summary instalment order or negotiating a proposal under the Insolvency Act 1967.

However, watch out for agencies that promise to reduce your debt by very large amounts or promise much lower repayments. Many of these are not reputable and unlikely to deliver. Remember, as with debt consolidation loans, if it sounds too good to be true it probably is.

You may be able to persuade all your creditors to agree to a “Creditors’ Pool.”  This means that all your debts are combined into one pool, and you then pay regular amounts into that pool. Again, the best way to negotiate this is with the help of an advisor such as a budget advisor, accountant, or financial advisor.  You may need to find a budget advisor, lawyer, accountant or financial advisor who is willing to administer the pool. 

If you are negotiating with your creditors to reorganise your debt, it may be wise to sort things out with the IRD first if you have any unpaid tax as this could save you extra penalties.  Your budget advisor, lawyer or other professional may be able to help you negotiate an agreement with the IRD.  You may be able to pay off what you owe through instalments or even apply to IRD for a write-off due to serious hardship, although there are no guarantees. You can contact IRD directly about their write-off process at www.ird.govt.nz.

The Insolvency Act also provides for two alternatives to bankruptcy.  These options under the Insolvency Act should be seen as final alternatives to negotiating with your creditors to enter a private agreement with them (as described under the previous section).  Though your creditors may keep a record of your credit problem under a private agreement, it will not be publicly available. 

Your options under the Act are:

• Proposals — the Insolvency Act allows you and your creditors to enter into an agreement outside of bankruptcy.  This is a more formal process than simply seeking an informal agreement with a creditor, and also allows you to make arrangements with all of your creditors.  You may put a proposal to your creditors who will consider it and decide whether to accept it or to reject it.  The terms of a proposal may include an offer by you to assign some or all of your property to your creditors, to pay your debts by instalments or at some time in the future or to compromise your debts by repaying less than 100 cents to the dollar.  Your creditors may require conditions, such as security or a guarantee.  Once you have reached agreement, the Court may approve the proposal.  The Court may refuse to approve your proposal if its terms are not reasonable or not calculated to benefit the general body of creditors.
• Summary Instalment Order — you may also apply to the District Court for a summary instalment order if you are unable to pay your debts, provided that your total unsecured debts are not more than $12,000.  The District Court may then make an order for you to pay your debts by instalments.  It may provide that your debts are paid in full or in part, and may also make orders concerning your future income and your ability to dispose of your property.

Bankruptcy and the laws that govern it are complex. It is strongly recommended that you seek legal advice about what filing for bankruptcy will mean for you and to determine which solution is most appropriate to your situation and how to proceed.

You should also know that your creditors may seek judgment against you for the amount you owe them and their legal fees. If you do not pay the judgment debt the creditor may seek to bankrupt you. If you receive notice that a creditor has started legal proceedings you should also seek legal advice.