To be insolvent, what does this actually mean? Insolvency simply means that either you don’t earn enough income to repay your debts, or otherwise your debt far exceeds the value of assets you own.
There are, however, ways to circumvent the dreaded word “bankruptcy”, and these alternatives depend on the level of debt you owe.
1. Creditor's compromise
If you’re unable to repay your debts to society, the first step would be to negotiate some form of compromise with the creditors that you owe the money to. This type of compromise is an informal agreement that allows creditors to agree on reducing your payment amount or the total amount you owe in such a way that you can continue to keep your business going.
A Creditor’s Compromise can be written up by a lawyer or at any law centre, and if you do so, be ready with the following information:
- Relevant financial info
- Disclosure of the monthly affordability
- A plan on how you will repay your creditors
- Consent from those that have lent you money
Unlike the creditor’s compromise, this is a formal agreement and requires court approval. It’s usually managed by a trustee of the Insolvency and Trustee Service and they will control your finances to ensure that the proposal is followed correctly. Again, a lawyer, in this case, is highly recommended, and you should consider the following aspects of the proposals:
- How do the creditors intend to receive payment as a result of the proposal?
- The repayment terms
- Security in the form of assets during the course of the loan
There is no loop-hole when you’re standing before the court with the proposal request, you will be required to prove that you are in fact insolvent. This can be done via evidence of debt, assets and any other financial obligations. This statement of your situation will also state the benefit of the creditors, so that they may have reason to agree or discuss what they require before approval is awarded. The proposal is put before the Court and a decision will be made as to whether the proposal is legal and all parties are happy. Summary Instalment Orders are also an option.
Tell me more about a Summary Instalment Order? (SIO)
SIO’s are a form of protection against the nasty fear of repossession. They’ll also spare you from bankruptcy if you owe any debt smaller than that of $47,000. SIO’s provide a great repayment term as well (which always helps) by allowing the debtor a three year or up to the five-year period, depending on the size of the debt!
What exactly is a No Asset Procedure? (NAP)
A No Asset Procedure (NAP) simply provides an alternative for debtors that carry debt between $1000 and $47,000 from declaring bankruptcy. A NAP lasts a year and stands as an official declaration of not being able to repay any debt or sell any assets. During this year an individual may not apply for any credit higher than $1,000.
Two things that you need to consider, however, one being that not only do you remain insolvent for four years on the insolvency register, but two, you will fall part of the list of Insolvents in the New Zealand Gazette. Unfortunately, along with such a declaration comes the “Uglies”, such as your credit rating being affected and banks actually closing your accounts with them.
A little advice on NAP’s…
If you’re going this route, make sure you obtain some serious budget advice first! Get in touch with a budget adviser to assist and work out the way forward with a NAP. There are forms you’ll need to complete, which they can help you with and the Insolvency service will send out letters to all your creditors advising them of the choice you’ve made regarding this declaration.
This is something you might consider doing when trouble is looming and you can’t really crawl out of the proverbial hole you and your business have dug for itself. It can, therefore, be a voluntary move on your part, or a Court might call for it if the business’s creditors are demanding or trying to sue for monies owed.
Once a business is seen as liquidated, the creditors are paid first from any money that comes as a result of the liquidation, i.e. if the stock gets returned this would be offset against the amount owed, or perhaps the building gets sold and there’s profit, etc.
So, what happens to me if I’m declared bankrupt?
Well, should this unfortunate event occur in your life, you would still be liable for any court-ordered fines or orders of compensation where your creditors are concerned? You’re also still liable for any expenses you currently have.
Remember this isn’t a position you ever want to find yourself in, there’s nothing nice about the processes and the restrictions that come with it. However, these things can occur and to the best of us, so guidance and help are at least exactly what you need during this time. You might not be able to work at certain places, or you might not be allowed to own any businesses for a certain period of time! You’ll need to declare all sorts of things, especially any form of income, so you’re basically not a free person, yet.
At this time, your entire estate is administered by an Insolvency Officer and anything and everything that can be sold will go to your creditors.
Lifestyle changes to expect:
- Your name and status will be published in the local gazette
- You’re not permitted to own a company until you’re discharged
- You’ll not be allowed to apply for credit above $1000 without declaring your status
- You’re deemed bankrupt officially for three years
- Your creditworthiness and credit score will be drastically reduced and remain this way for up to seven years
FAQ - Regarding bankruptcy
1. If I owe a lot of money to a number of creditors, but I am struggling to get them paid off, am I to consider declaring Bankruptcy?
No, this is something you file for as an absolute last resort! It’s also when you are way in over your head and don’t foresee any way out of the debt at all! That is usually why you’ll find businesses go bankrupt because the figures they owe are fairly large when the business is in trouble, as an example. Always research alternative methods before declaring bankruptcy. Debt consolidation and options such as those are a far easier means of eradicating debt issues if you think you can come out of it with smaller longer-term repayments. At least that way you are still in control of your estate.
2. A debtor I have, has declared for bankruptcy, how do I get my money?
If this is the case, then file a claim with an Official Assignee in order to get your money back. It’s that simple. You can even do it online! But you’ll have to provide the following information as supporting evidence of the claim:
- Loan agreements,
- Bank statements,
- Court orders,
- Receipts and
- Acknowledgements of debt.
The Official Assignee investigates your claim and will either approve or deny it. Should it be accepted, and any money is recovered, you will certainly get a share based on the monies from the liquidated estate!