If you're in serious debt and cannot meet your repayments, insolvency can be an option. Before you enter it, understand the long-term effects.
Keeping on top of your finances and making repayments is sometimes not enough to get on top of unmanageable debt. High interest loans, penalties and changes in your life can all affect your ability to make repayments.
When you get in to this position, insolvency can be an option, but you need to discuss it with a qualified financial mentor.
- Try other options first: Things like hardship applications and repayment plans are a good place to start.
- Understand the long-term effects: Insolvency impacts more than your bank balance.
- Pick the right type for your situation: Consider the size of your debts and if you have any assets.
Insolvency will release you from most of your debts where you cannot pay them when they are due. The three types of personal insolvency administered by the Official Assignee:
- Debt Repayment Order: If you have an income, can make some repayments, and your unsecured debt is under $50,000.
- No Asset Procedure: If you cannot make regular repayments, you have no assets and your total debt is between $1,000 and $50,000.
- Bankruptcy: A way to clear your debt if there is no way you can pay back the people or organisations you owe money to. If your unsecured debt is over $50,000 this is the only option.
- Another option is Proposals but these are administered by the court, not the Assignee.
For more detail see the Insolvency and Trustee Service's comparison tool.
Comparison tool(external link) — Insolvency and Trustee Service
Before you enter insolvency
Insolvency has long-term effects. While it can be a necessary option, there are steps to try beforehand:
- Contact your lenders about payment problems: If they know you are struggling, you can discuss other payment options.
- Apply for hardship: If something unexpected happens which makes it harder to repay your loan, you might qualify for hardship. This means a repayment holiday, reduced payments with more time to pay, or both.
- Talk to a free financial mentor: Explore your financial options and create a budget. The mentor can also speak to lenders, debt collectors, and others on your behalf.
A free financial mentor can help you contact the lender, or talk to the lender for you. Start by contacting the free helpline MoneyTalks.
Contact information(external link) — MoneyTalks
Effects of insolvency
Debt can cause significant stress to a person, whānau and community. Insolvency can stop your debt from growing and give you a chance to get back on your feet.
Becoming insolvent can also negatively affect you in the long term. Balance this against the impact of your debts. Effects can be:
- Negative credit rating, eg your credit score might make it harder to get loans in the future.
- Limited employment options, eg employers who see your insolvency as a risk might not want to hire you.
- Difficulty opening new accounts, eg banks and credit, gas, power, insurance and internet.
- Loss of privacy, as your name will go on a public register when you become insolvent.
- Impact on your partner's finances and assets, eg shared assets like your home or car might need to be sold. Shared debts might mean a partner or family member is asked to pay the whole debt themselves.
How insolvency affects you(external link) — Insolvency and Trustee Service
A free financial mentor can help you weigh up the options. Start by contacting the free helpline MoneyTalks.
Contact information(external link) — MoneyTalks you weigh up the options.
If you enter Bankruptcy, you will need permission to travel outside New Zealand.
There are three insolvency options managed by the Insolvency and Trustee Service (ITS). Each targets a different situation and comes with its own rules, expectations and restrictions.
Unsecured debt of $50,000 or less
Debt Repayment Order if you are able to make some repayments.
Total debt of $50,000 or less
No Asset Procedures if you have no extra money or assets to cover the debt.
Unsecured debt over $50,000
Bankruptcy if there is no way you can pay back the people or organisations you owe money to.
Debt Repayment Order
The best insolvency option if you owe $50,000 or less and are able to make some repayments.
You repay all or some of your debts over a set time period, usually three years.
The effects of insolvency (above) apply. Unlike Bankruptcy, you keep control of your assets, income and spending.
Who it's for
You must be:
- $50,000 or less in unsecured debt: your debt is not secured with an item the lender can repossess
- able to make some repayments: this could be a portion of the debt or the whole debt. Your repayments don't need to be at the same level as they were before applying for the plan.
What happens to the debt
A supervisor will work with you to figure out how much of your original loans you repay and the weekly repayment amount. Your lenders must agree for this plan to be finalised.
Your debts are combined. You make repayments to the supervisor, who pays the original lenders.
The original lenders cannot chase you for payments. No additional interest or penalties are added.
Debt Repayment Order(external link) — Insolvency Trustee Services
Example – Debt Repayment Order
Felicity has three kids and works full-time for minimum wage. She uses her credit card to buy Christmas presents. Paying it off is too much on top of her personal loan, rent and other bills. She goes to a free financial mentor for help.
After looking at all the options, Felicity applies for a Debt Repayment Order. She and her ITS supervisor work out a plan that involves paying off smaller amounts over a longer time period (three years). She can now manage her repayments and still provide for her children.
No Asset Procedure (NAP)
The best option if you owe between $1,000 and $50,000 in total debt, and you have no surplus income or assets.
A NAP is a one-off procedure and lasts for one year.
You cannot take on any new debt without telling the lender you are in a NAP. You can apply for a student loan but must tell StudyLink you are in a NAP.
If your financial situation changes during the NAP, eg pay rise, inheritance, you must tell your supervisor.
Who it's for
You must be:
- $1,000 to $50,000 in unsecured and secured debt: this does not include, student loans, child support, court fines or reparation only.
- unable to pay any of your debt: you cannot have any major assets you can use to make repayments, eg money in the bank.
You cannot get a NAP if:
- you have had a NAP or been bankrupt before
- your lenders do not agree to a NAP because they think you have enough assets or income to apply for a Debt Repayment Order or Bankruptcy instead.
What happens to the debt
Your lender cannot contact you and ask for any more payments. The interest and debt are frozen. At the end of the one-year process, your debts are cleared.
Secured debt is not included in a NAP. If you want to keep any items bought with a secured loan you will need to keep making the payments. If you don't want to keep the item, you need to return the item to the lender.
Once you’ve completed the NAP, you’ll remain on the Insolvency Register for four years.
You can file a No Asset Procedure through the Insolvency and Trustee Service website, or by visiting your local budget advisor or financial mentor.
Other debt you will still need to pay includes:
- child support payments
- court fines and reparations
- traffic and parking fines
- student loans
- loans taken out after you apply for the NAP.
Example — No Asset Procedure
George gets behind in paying his rent, power, phone bills and car finance. He is working on a low income and just paid for major repairs to his car. George feels overwhelmed. This is the first time he has not been able to pay his debts.
A financial mentor goes over his budget and helps George apply for a No Asset Procedure. George's debts are discharged after 12 months, releasing George from the burden of those debts and giving him a fresh start.
If you owe more than $50,000 in unsecured debt but can make some payments towards your debts, then a proposal may be accepted by your creditors. Once your creditors have agreed you need to get the approval of the court. Your proposal is administered by a registered insolvency practitioner, not the Assignee.
If you owe more than $50,000, Bankruptcy is your only option. Bankruptcy is the most serious option. You can apply for Bankruptcy yourself, or your lender can ask the court to make you bankrupt to get back some of the money you owe.
Bankruptcy is also your only option if you have been accepted into a No Asset Procedure or Bankruptcy before. It lasts for three years from the date you complete a statement of affairs (a document listing your income, spending, debts and assets). If you apply for Bankruptcy yourself, a statement of affairs is part of your application.
Bankruptcy lasts for three years. After this your name stays on the Insolvency Register for four more years.
If your lender makes you bankrupt, you still need to fill in a statement of affairs. The three-year time period doesn't start until you fill this in and are accepted by ITS.
Do it online(external link) — Insolvency and Trustee Services
Bankruptcy has a big impact on your life. In addition to the effects of insolvency listed above, this includes:
- Loss of assets: Savings, vehicles, properties, shares, are no longer yours. These can be sold to help repay your debts.
- Loss of financial freedom: Control of your day-to-day budgeting and living costs is still yours, 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.
- Work restrictions: You need permission from your supervisor if you want to be self-employed, run a business, or work for a family member.
- Travel restrictions: You need permission to travel overseas, including on holiday.
- No new student loans: An existing student loan will be included in your Bankruptcy debt. You cannot take out a new student loan until your Bankruptcy ends.
- No rights to take legal action: Any legal action needs to go through your Official Assignee, the official person who looks after your bankruptcy.
Who it's for
If you owe more than $50,000, Bankruptcy is the only insolvency option.
What happens to the debt
Once you are in an insolvency procedure, lenders cannot ask you for payments. When the procedure ends, all debts in your name are released.
Not all debts are included child support, court ordered fines and reparation must still be paid. Unlike NAP or DRO, Bankruptcy does include your student loan.
During Bankruptcy you can keep:
- money up to $1,300
- tools needed for your work, eg a builder can keep hammers, saws and drills
- a vehicle worth up to $6,500
- necessary household furniture and belongings, eg couches, kitchenware
- items on hire purchase, if you keep up with payments.
Applying for insolvency
If you want to find out more about insolvency, talk to Insolvency and Trustee Services about the process and what you might qualify for.
If you do want to apply, follow these steps.
- Register: Create an online account with Insolvency and Trustee Services.
- Activate your account: Set up your user name and password.
- Apply online: Fill in an application form for one of the three insolvency options.
Registration(external link) — Insolvency and Trustee Services
Budget calculator: The online application includes information on your debts, income and expenses. It's a good idea to calculate your numbers beforehand. A budget calculator helps you figure out where your money goes, and how much you can afford in repayments.
Budget calculator(external link) — Insolvency and Trustee Services
Debt Repayment Order calculator: If you're applying for a Debt Repayment Order, use the DRO calculator to see how long it will take to pay off some or all your debt. For example, compare how long it will take to pay off 50% of the total debt at $50 a week, or 100% of the debt at $80 a week.
Debt Repayment Order calculator(external link) — Insolvency and Trustee Services
Example – Bankruptcy
Pania has several personal loans when her dad dies unexpectedly. She can't afford the funeral and gets another loan to cover the costs. This puts her total debt over $50,000. A few missed payments means the debt is growing faster than she can repay it.
A financial mentor talks her through her options. Because her debt is so high, she cannot apply for No Asset Procedure or a Debt Repayment Order. She applies for Bankruptcy. Her assets are taken to pay the lenders, including one of her two cars.
Get support at any point from:
- MoneyTalks: This helpline gives free budgeting advice to individuals, family and whānau. Financial mentors can help you understand your financial situation, organise your debt and plan for the future. They can also put you in touch with a local budgeting service and help with issues you're having with lenders. Phone 0800 345 123, or use live chat, email or text, if you prefer.
Contact information(external link) — MoneyTalks