Bankruptcy in New Zealand - The Definitive Guide

If you're considering filing for bankruptcy, our guide explains everything you need to know, the pros, the cons and must-know facts

Updated 23 May 2021
If you are suddenly unemployed or unable to pay your debts and your finances can become unmanageable, bankruptcy is one of three insolvency options available. This guide is dedicated to outlining bankruptcy, but we do explore the other options.

Bankruptcy, as severe as it is, is sometimes a necessary step to getting your life back on track. For those with overwhelming debts and financial burdens, New Zealand law offers an opportunity for a fresh start.

Know this: The decision to file bankruptcy will relinquish ownership of any sizeable assets, but not your normal household goods. You can still keep your car as long as worth no more than $6,000.  The Insolvency and Trustee Service will not automatically take other items as they look at each application on an individual basis.  You have to declare if you have any goods worth more than $3,000 individually – a piece of jewellery, artwork, etc.  You are not permitted to have more than $1,200 in all your bank accounts at the time of applying.

Bankruptcy may not be the most suitable option in every situation - we explore Debt Repayment Order (DRO) and No Asset Procedure (NAP).
However, this guide focuses on bankruptcy, its pros, cons and everything essential to know about the process.

This guide is designed to assist you with understanding bankruptcy in New Zealand and deciding if this option is right for you. We look at the risks, pros, cons and long-term effects of filing for bankruptcy. This guide covers:

Is Bankruptcy the Right Decision?

Before filing for bankruptcy, keep in mind that:
  • Filing for bankruptcy can have life-changing implications and will require you to surrender your certain assets to a representative of the courts, known as the Official Assignee, who will distribute their value to cover your debts.

Know This: The Official Assignee: what is it and what is their role in the bankruptcy process? 
  1. The Official Assignee is part of the New Zealand Insolvency and Trustee Service, who provides debtors with information about bankruptcy and other insolvency options.
  2. If you become bankrupt, the Official Assignee acts as trustee, administering the debts you incurred up to the time of your bankruptcy.
  3. Once you are declared bankrupt, your creditors then deal with the Official Assignee rather than with you, the bankrupt person.
 
Before proceeding to bankruptcy, consider other options:
  • You can file for bankruptcy if your debts total more than $1,000. But, if you owe less than $50,000 (not including a student loan), you may have an alternative to bankruptcy in the form of a Debt Repayment Order (DRO). Find more information on filing for a DRO here.
  • If you have no assets, you can file for a No Asset Procedure in lieu of bankruptcy. For more information on a No Asset Procedure, click on the NAP summary here.  
  • If you owe more than $50,000 and/or have other reasons, bankruptcy may be the most suitable option.

Which option is best?
  • When considering bankruptcy (or an alternative), you must complete a Statement of Affairs and submit it to the Official Assignee.
  • You will need to state which type of insolvency you are applying for at the time you submit your Statement of Affairs. The Official Assignee may back with another option they think could be better suited to you.
  • Once received, The Official Assignee assesses the information submitted and will offer advice and assistance about which insolvency option is the most appropriate for your circumstances.
  • What option is taken will depend on the size of your debts, the background of the debts, your assets and previous bankruptcy or insolvency history, and your reasons for applying for bankruptcy.

​Important:
  • Bankruptcy will negatively impact your credit rating and will remain on your credit file for seven years, which will make it very hard for you to obtain any substantial loans through banks and lender companies.
  • You will be “bankrupt” for three years, during which time you will face numerous financial restrictions such as the type of possessions you’re allowed to have, how much cash you’re allowed to have, and the maximum value of your belongings. You will be discharged from bankruptcy after three years, or possibly earlier in the case of an application to the High Court.
  • Only upon being released from bankruptcy will you be debt-free.

Our view: The benefits to a person who been insolvent far outweigh the limitations. Very few employers have a clause in the employment agreement regarding insolvency – this is only usually reserved for people handling money, transactions, in a place of trust etc.

Steps to take BEFORE filing for bankruptcy

Before filing for bankruptcy, you should exercise all possible alternatives to securing your financial stability, which may include:
  1. Selling your assets yourself: If you have any assets that can be sold, you should consider doing so before filing for bankruptcy. Remember, bankruptcy may cause you to surrender all non-essential assets valued over $3,000, which may include any valuable possessions, your home equity, savings, and a vehicle worth more than $6,000 — leaving you only with life and work essentials.
  2. Minimise your budget: You may be able to stave off a looming bankruptcy by budgeting accordingly and removing non-essential expenses from your life. This can include everything from lifestyle purchases to daily expenses that you can simply go without. 
  3. Create a creditors’ pool: In some cases, some or all of your creditors may be willing to cooperate and create a unified payment structure that is affordable and keeps you from going bankrupt. You can talk to the Citizens Advice Bureau about working with creditors. Our debt help guide has more details. This is similar to debt restructures, which help fomalise your obligations and give you a framework to make repayments. Be aware, there is risk because all creditors have to agree, and they can withdraw it at any time.
  4. Seeking help from budgeting professionals: Our debt help guide explains this in detail. 
  5. Get a Debt Repayment Order (DRO): In the case of debts totalling less than $50,000, you may be able to arrange a payment structure that grants more time to pay your debts and allows you to avoid bankruptcy. More information can be found here. A DRO is done through a supervisor and the Insolvency and Trustee Service.  It is a popular alternative to a NAP and bankruptcy as it allows people to pay off their debt over 3 years (can be up to 5) but at a rate they can afford with no interest, fees or charges incurring over that time.
  6. Receive free legal advice on bankruptcy: Speak with financial professionals who can help you assess your bankruptcy terms, and decide if this process is necessary or can be avoided. Seek out free legal advice through government channels in your municipality or try helpful community services such as Budget Advisors (Financial Mentors) and Community Law.

Know this: Debtors without assets can apply for a No Asset Procedure (NAP), which is an alternative to bankruptcy and offers fewer restrictions and a shorter time period in comparison. It lasts for one year and your total unsecured debts (not including student loan) needs to be under $50,000. Learn more about NAPs here.

How to File for Bankruptcy - Three Must-Know Steps

To file for bankruptcy under New Zealand law, you will need to do the following:
  1. Review the application checklist and follow its instructions: More information on the bankruptcy checklist can be found here.
  2. File a bankruptcy debtor’s application: You can do so at a local court or online (you need to have a RealMe account in order to be able to submit an application online) via the New Zealand Insolvency and Trustee Service, found here.
  3. Await the decision: Once your application is submitted, the Official Assignee will approve or reject it, typically within ten working days. ​

10 Must-Know Bankruptcy Facts

Our must-know facts outline the small but important details to be aware of before filing for bankruptcy.

You can file for bankruptcy as a debtor — or you can be forced into bankruptcy by a creditor

Being late on enough debt payments can be grounds for a creditor (i.e. bank, loan company, credit card issuer) to file a bankruptcy application on your behalf. By the time you find out you’re being pushed into bankruptcy, it may be too late.

To avoid this, it's best to stay in touch with your creditors, and if necessary, file for bankruptcy yourself. This gives you more control around the initial stages of the process.

Your bankruptcy will be public knowledge among your service providers — and they can act on it

Once you’re declared bankrupt, your service providers will learn about it. This means that companies who control your utilities such as power and gas as well as insurance, telephone, and internet providers can choose to terminate or place restrictions on your account.

However, with regards to keeping up to date with your current power, phone, internet, utilities provider – so they are not listed as a creditor in your SOA, you will probably be able to keep them as your provider.  Discussing this issue with the Dunedin Budget Advisory Service, their team confirmed that "no utilities provider has stopped services to an insolvent client who does not owe them money" in their experience.

This Stuff.co.nz article explained that bankrupted people struggle to open a bank account in some cases. We believe you would only struggle to open a bank account if you owe Kiwibank and The Co-operative Bank money, as both these two banks take insolvent customers. These banks also keep bank accounts open once they discover a customer is insolvent.

​Insolvency and Trustee Services will allow you to control all of your day-to-day budgeting and living costs, but your spending is closely monitored. They might get you to make regular payments to your lenders. If you inherit money, win a prize or get a pay rise, you must tell your supervisor. This money will go towards your debt. However, you will only need to contribute towards your bankruptcy if your budget and/or bank statements show a considerable surplus.

Bankruptcy can make it hard to find a new job

Some businesses may consider your bankruptcy a liability and be unwilling to hire you. ​Furthermore. you must get permission from ​Insolvency and Trustee Services if you wish to:
  1. Take part in the management or control of any business (this includes if you file your own taxes, ACC levies or workplace insurance, or if you’re responsible for meeting any regulations, e.g. health and safety requirements)
  2. Be self-employed or employed by a relative or a relative’s business.

You will be assigned a new IRD number, and your tax refunds are considered assets

Once you are approved for bankruptcy, you will receive a new IRD number, and your old number is voided. It will be necessary to update your personal information at work and at your bank once you have received a new IRD number. 

If you have a business, it is considered an asset and will be sold and your business partnerships dissolved

Along with your business assets, any partnerships you are currently in will be dissolved, and the value of your share sold to cover your debts. Whether your share can be sold to your business partner or not will be determined by the Official Assignee.

As Insolvency.govt.nz explains:
  • If one partner becomes bankrupt, the partnership is automatically dissolved. Only the non-bankrupt partner(s) can continue to deal with the partnership assets and debts. The bankrupt person cannot continue to be involved.
  • If all partners become bankrupt, the partnership is dissolved and all assets and debts of the partnership are dealt with by the Official Assignee.

There will be restrictions against running a business, being self-employed, and working at a family business

During bankruptcy, you will need special permission to enter a managerial position, work for yourself, or join a business owned by family members. 

You must disclose any inheritance or prize winnings during bankruptcy to your Official Assignee

If you receive an inheritance, win prizes, or win a lottery during bankruptcy, your Official Assignee will determine if some or all of their value will be used to repay your debts. It is an offence not to notify them of such money being received. The Official Assignee may take all or some of the money to help repay your creditors.

Your KiwiSaver balance is safe from bankruptcy — unless you touch the money

If you absolutely need to withdraw money from your KiwiSaver account during bankruptcy, talk to your Official Assignee about the implications involved.

Any money withdrawn from your KiwiSaver account during bankruptcy may be subject to your creditors. While you will still be able to make payments into your KiwiSaver or retirement fund during bankruptcy, your Official Assignee will determine if those payments can be seized to repay your debts.

Your right to take legal action will be given to the Official Assignee when bankrupt

If you wish to make a claim during bankruptcy, it will be up to the Official Assignee to permit legal action. Make sure to inform them of any litigation you may be involved in, are considering, or of which you might be the subject​ during bankruptcy. 

Completing a Statement of Affairs is the FIRST STEP and ONLY starting point to determine what option is the best for your situation

It's best not to be fixated on bankruptcy as the only option - in many cases, bankruptcy can be avoided altogether. Completing a Statement of Affairs is the best starting point - while lengthy and detailed, it provides a comprehensive assessment of your financial situation. 

Additional help:
  1. This Statement of Affairs form can be completed online at insolvency.govt.nz which will speed up the receipt of your application and potentially result in an earlier discharge (should you be declared bankrupt)
  2. You can call the government's Service Centre on freephone 0508 467 658 for help completing the form
  3. To complete the form, get all of your important documents handy – eg bills, payslip, passport, IRD number, bank statements, policy documents, business records, etc.

Bankruptcy Frequently Asked Questions

Bankruptcy is not a standard life event, and its effects are wide-reaching. Our list of FAQs below helps to reassure and explain what happens in everyday life.

Will I lose my job due to bankruptcy?

There are currently employment laws in place that offer protection from termination due to bankruptcy. Any reason for dismissal must have substance, and the process of termination must be fair. If termination occurs as a result of your bankruptcy, you may be able to pursue a legal course of action with the assistance of community lawyers.

Does bankruptcy clear me of all my debts?

Bankruptcy will address the majority of your debts that exist prior to going bankrupt. Some debts may remain after bankruptcy, such as child support payments, court fees, and traffic fines. Bankruptcy does not cover any debts incurred after approval.

What happens with taxes when you're bankrupt?

Once bankrupt, your financials will be under the control of the Official Assignee, and you will be discharged of your tax debt, which does not include child support or fraud debt.

Your tax refunds will be considered assets and may be used to repay your creditors. You will need to keep filing tax returns under your new IRD number, and the Official Assignee will receive your returns until you are discharged.

For more information on taxes during bankruptcy, visit the IRD's dedicated page.

What about student loan debt?

Bankruptcy will relieve you of your student loan debt, and you will no longer be required to make payments. However, you will be unable to apply for a student loan during bankruptcy, and the procedure will also affect your credit rating — which can make receiving a new student loan quite difficult. This Stuff.co.nz article explains bankruptcy and how it affects student loans in detail.

Will creditors still be able to come after me when I’m bankrupt?

When you are bankrupt, any pre-existing creditors will receive a cease-and-desist order from the Official Assignee, who will be in control of your finances and manage a payment structure for the purpose of repaying your creditors. It is illegal for creditors listed in the SOA to pursue debt during and after an insolvency. There seldom is a payment structure for bankruptcies as the debt is wiped. However, this does not apply to any new debts incurred during or after bankruptcy (i.e. those not on the SOA).

Will my retirement funds be protected from bankruptcy?

Protection over retirement funds extends to your KiwiSaver scheme and any accounts deemed eligible by the Official Assignee. Any other investment and retirement funds may be considered assets and subject to debt collection. Any money withdrawn from your KiwiSaver account during bankruptcy, i.e. under a hardship application, may also be considered an asset and can be used to repay your debts. 

How does bankruptcy affect joint accounts and joint assets?

Joint accounts are typically closed as a result of bankruptcy, and any joint assets may be liable for covering your debts. If you have joint debt with a partner and are considering bankruptcy, you should speak with a professional about what to do next. You can find more resources for government and legal advice here.

Can I travel when bankrupt?

During your bankruptcy term, you will not be allowed to leave New Zealand without special permission from the Official Assignee. You will be able to resume normal international travel when you are discharged, typically after three years of being approved for bankruptcy.

Permission can be granted under compassionate grounds, of if the travel was pre-arranged, a pre-paid holiday or a holiday which can be proven was gifted to you, i.e., you didn’t pay for it.

Bankruptcy - Pros and Cons, and the Bottom Line

Bankruptcy is a mixed bag and, for the most part, has considerable downsides. We outline the pros and cons below, and provide a summary of what you need to be aware of before proceeding. 

Bankruptcy Pros:
  • Bankruptcy relieves the majority of your outstanding debt, offering you the chance to start over
  • Bankruptcy allows you to keep your KiwiSaver funds (unless you specifically withdraw them under a hardship application)
  • The alleviation of stress of creditors demanding money you don’t have is a great weight off people. Mental health frequently improves once someone becomes insolvent and the pressure and worry is gone.
  • Bankruptcy is turbulent, but it does allow you to work and lead a normal life without the debt obligations

Bankruptcy Cons:
  • Bankruptcy is all-encompassing - you have to relinquish all of your non-essential assets, you may lose your house (if you own it), as well as your vehicles and other assets
  • Your credit score will drop as bankruptcy is added to your credit history (but this cannot be accessed publicly). Also, the increased use of positive credit reporting will help restore your credit score after your are discharged from insolvency, although this is still only a voluntary option for creditors and utilities providers.​
  • Your bankruptcy will be public information, reported on the Insolvency Register
  • You will have financial restrictions imposed on you, such as limited opportunities to open a bank account, obtain a credit card or phone plan etc.
  • You may find it hard to get a new job
  • You will be unable to travel overseas without permission

The Bottom Line
  • Bankruptcy is an often-stigmatised term because of its financial implications, but it can be a light at the end of the tunnel for many who are completely overwhelmed by their debt.
  • Bankruptcy should always be considered a last resort — but a welcome one. We take the view that there’s no shame in having to file for bankruptcy and get a clean slate when you are simply out of options.
  • People that recover from bankruptcy often consider themselves wiser and more experienced, and go on to lead successful, more resilient lives.
  • If you are living through financial difficulties and bankruptcy is a growing possibility, it may be best to exercise the option sooner than later.
  • New Zealand has a supportive environment and there are many agencies with people with whom you can speak. They will offer (free) personalised advice that can help you overcome your financial hardships - the Citizens Advice Bureau and Community Law Centres are good starting points. 
  • The Christchurch-based Meetup Group, Debt Free for Life, also offers excellent information and its founder, Lisa Cowe, is widely reported in the media as a bankruptcy expert.
  • This excellent Bankruptcy and Insolvency guide is comprehensive and outlines the options available depending on your situation.
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