Alternatives to Bankruptcy

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 If your debts are running out of control, the common presumption is that your only option is bankruptcy.  However, what many do not know is that there are other options available if you want to avoid bankruptcy.  These options may not be available to everyone, and can only be determined on a case-by-case basis. The circumstantial criteria of the debt allows individuals to utilise such alternatives to bankruptcy.

What is the Bankruptcy procedure?
Bankruptcy is the legal proceeding whereby people who cannot pay their bills get a fresh financial start.  However, bankruptcy does not occur without severe consequences.  It lasts for three years (however it can be extended), during which time you are not permitted;

·                     to be a director of a limited liability company
·                     to incur credit of $1,000.00 or more without disclosing you are bankrupt;
·                     to conceal assets;
·                     to leave New Zealand without consent;
·                     to enter into, carry on or take part in the management or control of any business; or
·                     to be employed by a relative or an entity owned, managed or controlled by a relative.

These are the harsh realties of being adjudicated bankrupt and bare a stark contrast to the various alternatives that individuals have when facing bankruptcy.

Alternatives
When an individual is faced with bankruptcy, seeking legal advice is generally not their first option, due to the expense.

Therefore, many debtors merely role over without realising there are other options.

Sub Creditors Compromise
If an insolvent individual realises that they are not in a position to pay their debts but bankruptcy proceedings have not yet been issued, the best first step is to work towards a compromise with the creditor to whom they owe money.

A creditor’s compromise can be drafted by lawyers or by the individuals themselves. It must illustrate a clear reflection of your current financial position and show a concise plan as to how you intend to pay back the outstanding moneys.  In the event that there is more than one creditor, it is suggested that approval is sought from the majority of the creditors and at least 75% of the creditors in terms of the monetary lending value.

The obvious advantages of this are that you are subject to the proposal, but are not subject to any of the onerous restrictions that bankruptcy, no-asset-procedure, or a Part 5 Proposal put you under.

Creditor’s compromise
If a sub-compromise cannot be achieved with a creditor, or creditors, and bankruptcy proceedings have been initiated, there is still an option under Part 5 of the Solvency Act 2006 to avoid bankruptcy and achieve a creditor’s compromise.

A Part 5 proposal can be presented to a creditor at any stage up until the final bankruptcy proceedings adjournment.  The proposal is similar to a sub-creditor’s compromise, but is a more formal legal arrangement, and must be recorded in writing.

The biggest hurdle to this option is that the creditor’s compromise proposal must be ratified by the Court, and not just by the individuals themselves as above.  

At this time, other creditors can oppose the proposal.  However, it is left up to the Courts to decide whether or not to oppose the proposal.  In the event that the majority of creditors accept the proposal, the Court will generally proceed with the proposal unopposed. The key to obtaining a successful compromise proposal is by providing credible information and a realistic and achievable plan for obtaining funds, whether it be by selling assets or receiving third-party funding.

A further benefit of this option for the creditor is that the insolvent individual is not restricted from continuing on with business activities.  Therefore, the insolvent individual is able to continue earning in a certain capacity which can be attributed to the outstanding debt.  Further, cash can be injected to the outstanding debt from third parties, which again is highly unlikely to occur in the event of bankruptcy proceedings.

The benefit for the insolvent individual is that they are not subject to the travel restrictions that bankruptcy imposes, and a proposal of this nature remains private between the parties and is not subject to public advertisement.

The paramount consideration for a creditor when dealing with an individual debtor and weighing up whether a subpart 5 proposal should be considered, is that such proposal must provide a better outcome for that creditor than that achieved by way of bankruptcy.  The proposal is to be recorded in writing.

No Asset Procedure
No asset procedure is another alternative to bankruptcy, but is limited by the debtor’s personal circumstances.  It is only available to insolvent individuals with a debt under $40,000.00 and whom have not previously been subject to bankruptcy or a no-asset-procedure.

To apply for a no-asset-procedure, an individual is required to file an application form, pursuant to section 362(1) Insolvency Act 2006, with the Ministry of Economic Development for consideration. They are then advised whether or not it is accepted.

It is advisable that if an individual is considering pursuing this avenue, it is advisable to fill out the application form and file it prior to the bankruptcy hearing (if a bankruptcy notice has been served upon you). The Court can then be advised at the hearing that this is the avenue you wish to take, as opposed to being adjudicated bankrupt.

No asset procedure lasts for one year and is a blanket admission to your creditors that you have no means of repaying the creditors and no assets in your possession. Your debts are then cleared, as in bankruptcy.

If a no asset procedure is granted, the insolvent individual may incur credit of no more than $1,000.00 and their name will remain on the insolvency register for only 4 years, in comparison to up to 7 years in the event of bankruptcy.

Summary instalment orders
The final option for an individual facing bankruptcy is a summary instalment order. A summary instalment order is an order made by the official assignee that allows a debtor to pay back the money they owe (in full or on such alternative terms as the court agrees to) by way of instalments over a fixed period. The fixed period is only up to 3 years or can be extended to 5 years in certain circumstances.

As with the No asset procedure, the official assignee can only make a summary instalment order if it is satisfied that a debtor’s unsecured debts are not more than $40,000.00 and the debtor is unable to repay the outstanding debts immediately but does have the capacity to pay them over a period of time. A failure to comply with the summary instalment order can result in it being terminated and creditors can re-instigate legal action for the remaining outstanding amounts. At this time, it may lead to bankruptcy of the debtor.

There are certain advantages of a summary instalment order, namely that it helps an individual manage the repayment of their outstanding debts and that it is not advertised in any newspapers or the New Zealand Gazette. There is a down side to a summary instalment order, in that the debtor cannot obtain credit of more than $1,000.00 without first informing the credit provider that they are subject to a summary instalment order.

The most important thing when you find yourself unable to pay your debts is to seek advice as soon as possible.  There may be options that could save you from bankruptcy. 

For further advice on these alternatives, or assistance with bankruptcy proceedings, contact debt collection expert Wendy Alexander by phone on 09 837 6844 or email wendy.alexander@smithpartners.co.nz