Bankruptcy: How does it work, and should you do it?

Thursday, 13 December 2018

Andrea Moore is bankrupt after the failure of her fashion label.

Fashion designer Andrea Moore made news this week when it was revealed she had declared bankruptcy.

Her company was put into liquidation at the start of the year owing $2 million, and now she has had to walk away from her personal debts, too.

Moore has gone into real estate instead.

But while bankruptcy is an option for people with debts they cannot manage, it's not a get-out-of-jail free card.

* Official Assignee plans to tap bankrupts' KiwiSaver accounts**

* Designer Andrea Moore bankrupt, now real estate agent

In October, there were 142 people declared bankrupt.

Who can go bankrupt?

Any individual can go bankrupt when they have no chance of repaying their debts and owe at least $1000.

You can either do it yourself by filing a debtor's petition with the Official Assignee (OA), or the people you owe money to can submit a creditor's petition at the High Court.

The OA is responsible for dealing with all insolvencies.

Wealthy people often own their houses in a trust, so they don't lose them when they go bankrupt.

What happens?

Bankruptcy and insolvency lawyer Tony Johnson, of Martelli McKegg, said the most important thing to understand was that from the moment you were judged bankrupt, you would own nothing. Everything would be transferred to the OA.

Apart from tools you need for work, basic household furniture, a cheap vehicle (worth up to $6000) and a small amount of money (up to $1200), anything that you own is forfeited to go towards paying your creditors.

'You don't have any liabilities. All your liabilities are released. It's a trade-off. On one hand you have to be in this bankruptcy regime. On the other, you are released from your personal debts.'

People fill out a statement of affairs form which details the situation for the OA. The three-year bankruptcy period starts when that is approved.

Johnson said the reason that some people seemed to carry on untroubled by bankruptcy was the OA could often not access property owned by a trust.

'Wealthier people have all their assets in trusts and things like that. That means the OA has no rights to those trust assets unless they can somehow trace them back. There are clawback provisions but if they don't apply, that's how people survive quite comfortably, because those assets are not theirs, they belong to a trust.'

If a house is owned jointly, the OA can require the other person to come up with a half share of the equity in the property.

'If the other owner isn't able to the OA can, not necessarily will, go so far as to have the house sold and take half and give half to the other partner.'

What can't you do?

You'll be allowed to keep a small amount of money.

There are rules for the three years of bankruptcy.

You may have to give up part of your salary to pay your creditors.

Johnson said this was usually only required in cases where people earnt high incomes.

If you inherit anything, it will go to the OA. You cannot run your own business without permission, or travel overseas. You also cannot work in a management role in a relative's company.

If you apply for any loans, you have to tell the lender that you are an undisclosed bankrupt.

Afterwards

After three years, the bankruptcy ends, so long as there is no objection from the OA.

But it stays on your credit files for seven years, which will make it tough to get a loan and could be a problem if you apply for a rental property or a new job.

If you go bankrupt again, all your bankruptcies stay on your file permanently.

What are the alternatives?

If you owe less than $47,000 you can opt for a no-asset procedure, which only lasts 12 months. You need to have no realisable assets to meet the criteria for this and no means of repaying any amount that you owe. You can only do this once.

You can also go for a summary instalment order which is used in cases where people are able to pay some of their debt back.