I am insolvent and in debt. What are some good options to turn my situation around?
Insolvency means that either you aren't making enough money to pay your debts, or that you owe more money than the value of the assets you own. The options available to you if you want to avoid bankruptcy, will depend on your level of debt. They include:
Creditor's compromise. The first step if you can't pay your debts is to work towards a 'compromise' with the people or organisations you owe money to (the creditors). A creditor's compromise is an informal agreement with creditors that may allow you to reduce the amount you owe, alter your payments to something you can afford, and possibly allow you to keep your business going. The compromise process can be drafted by your lawyer or community law centre. If you are going to try to ask the creditors for a compromise, you will need to
- gather relevant information on your finances
- show the level of money you will be able to pay off (this needs to be approved by 50% of your creditors in number and 75% in monetary value)
- implement a plan to pay back those who have lent you money
- get consent from the people who have lent you money
It is best to get legal help when drafting such a compromise, as it can be complicated. If you want someone to help, your local CAB can point you in the right direction.
Proposal: A proposal is a formal agreement that needs to be approved by a Court. It is usually administered by a trustee who is employed by the Insolvency and Trustee Service, and will control your finances to make sure the proposal is followed. You should always have a lawyer with experience in this area to guide you through the process. When putting together a proposal, think about
- how the proposal will provide repayment for each of the creditors
- what your payment terms will be (i.e. lump sum or instalments)
- whether you will offer personal assets as security on the agreement
You will also need to prove the financial situation you are in to your creditors. This involves a statement and affidavit showing your debts, assets, and obligations, as well as a statement of how you became insolvent and a statement of how the proposal will turn the situation around and benefit your creditors. You'll need to gain the approval of 50% of your creditors in number and 75% in monetary value. The proposal is put before the Court, where the creditors have a chance to speak and it is decided whether the proposal is legal and of benefit to the creditors.
Other options may be a Summary Instalment Order or a No Asset Procedure (see below). For more information on your options, consult your local CAB or see the Insolvency and Trustee Service webpage.
What is a Summary Instalment Order? (SIO)
If you have a debt of less than $47,000, a Summary Instalment Order (SIO) could protect your belongings from repossession and save you from bankruptcy or a No Asset Procedure. Summary Instalment Orders provide debtors in financial difficulty with the option to repay all or some of their debts in instalments over a period of three years, or up to five years in special cases. Your credit rating could be affected for up to seven years.
The SIO is ordered by the 'Official Assignee', a referee who will attempt to reach an outcome that is beneficial to everyone.
An application for a SIO can be made to the Official Assignee by you or the people you owe money to (if they have your consent). The process is explained on the Insolvency and Trustee Service website, and if you require any help in making your application, please visit your local SIO officer. If you need help finding a Summary Instalment Order officer, see your local Citizens Advice Bureau.
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What is a No Asset Procedure? (NAP)
A No Asset Procedure (NAP) is an alternative to bankruptcy for those with debts between $1000 and $47,000, who have not previously gone bankrupt or undergone a No Asset Procedure, and who have no assets. It lasts one year, and is an official declaration to those you owe money to that you have no means to repay them and no assets left to sell.
During a No Asset Procedure you may incur no more than $1000 credit. Your name will remain on the insolvency register for four years, and you will also be listed as insolvent in the New Zealand Gazette (the government newspaper). Your bank may close any accounts you hold with them, and creditors will still be allowed to repossess any property you may hold. Your credit rating may be affected for up to seven years.
For more information on what a No Asset Procedure consists of and the consequences of entering into one, see the Insolvency and Trustee Service webpage on No Asset Procedures or ask your local CAB.
I'm considering a No Asset Procedure. What advice should I seek?
If you are considering a No Asset Procedure, the best thing you can do is to get sound budget advice immediately. Your local CAB can recommend a budget advisory service to help you work out if you can avoid a No Asset Procedure. The CAB also has forms available if you're sure that you need to go ahead with one. In the case of a No Asset Procedure, the Insolvency Service will send out notices to your creditors to inform them of your decision.
What does liquidation mean for me and my business?
Liquidation can be voluntary if you feel that your business is going under, or it can be ordered by the Courts if your business owes money and your investors demand repayment.
If your business goes into liquidation, it is possible that any business property will be sold and the proceeds used to pay the people who have invested in your business. Secured creditors get paid back first if there is any money.
Sometimes the business can be salvaged by the liquidator, to be sold as a going concern, but this is somewhat rare. If there is not enough money from sale of the business properties to repay investors and there is no new investment in the business, the company will be removed from the register.
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What will happen if I am declared bankrupt?
You can enter bankruptcy if you owe at least $1000.
If you are declared bankrupt, you will still be responsible for Court ordered fines, such as parking fines, or orders of compensation for your creditors. You will also be responsible for child support and your own expenses.
The rest of your debts cease to exist, but there are several responsibilities you have to fulfil. There will be restrictions on where and how you can work, and what you are allowed to own. You will have to attend meetings and also inform the Official Assignee about anything important in your financial life.
During bankruptcy, your estate will be administered by an Insolvency Officer, who works for the Insolvency and Trustee service, and the proceeds from anything that can be reasonably sold will be shared out among your creditors by the Official Assignee. Bankruptcy means that
- your name, and the fact that you are bankrupt, will be published in the local paper
- you can no longer direct or own a company until you are discharged by the Official Assignee
- you will not be able to take out a loan of more than $1000 without telling the lender that you are an 'undischarged bankrupt'
- you will remain bankrupt for at least three years
- your credit rating will be greatly reduced (it can be affected for up to seven years), and lending institutions may not lend money to you even after you are discharged from bankruptcy
Simple information on what bankruptcy involves is available on the Insolvency website.
I owe a lot of money to several creditors, and have only been able to pay them back small amounts. Would it be a good idea to file for bankruptcy?
Bankruptcy is the last resort when you have large debts that you are simply unable to pay. Filing for bankruptcy immediately stops creditors attempting to collect their debts from you. If you have not paid your debt by a certain date or under certain terms, a creditor can also apply to Court to have you declared bankrupt. (See the previous question for more information about bankruptcy.)
Before considering bankruptcy, you should investigate all the other alternatives. If you become bankrupt, you are no longer in control of your estate. Also, if you become bankrupt rather than paying your debts, you may have cost the people you owe money to a lot of money. A Summary Instalment Order or No Asset Procedure can help you get out of debt without the same damage to your reputation. If you need advice, your local CAB can help.
Someone who owes me money has filed for bankruptcy. Is there anything I can do to get my money back?
If someone who owes you money has filed for bankruptcy, or entered into a Summary Instalment Order, you will need to file a claim with the Official Assignee in order to get the money back. You can do this online. You'll need to provide evidence to support your claim, for example:
- loan agreements,
- bank statements,
- court orders,
- receipts and
- acknowledgements of debt.
The Official Assignee will examine your claim and advise whether your claim is accepted, and what you can reasonably expect to recover from the debtor (the person who owes you money). They will distribute any money that comes from the bankrupt's liquidated estate.
More information is available on the Insolvency and Trustee Service website.