What are the consequences of bankruptcy?

Find out what it means to be bankrupt, and if it will be worth it for you.

Updated . What changed?

Fact checked

Declaring bankruptcy can be seen as a way out when you’re drowning in debt, but what actually happens when you declare bankruptcy? What are the consequences of bankruptcy and how long do these last?

This guide will take you through exactly how declaring bankruptcy will affect your life and what debts it actually clears, so you can decide if it’s the right avenue for you to take.

What does it mean to declare bankruptcy?

This is a process where you are legally declared unable to repay your debts. If you enter bankruptcy yourself voluntarily, it is referred to as a debtor’s petition but you will have to be insolvent (unable to pay your debts when they are due). You can also be made bankrupt by one of your creditors through a court process which is called a creditor’s petition.

How do you declare bankruptcy?

To be eligible for bankruptcy you need to:

  • Be insolvent. That is, be unable to pay your debts when they are due.
  • Be present in New Zealand or have a residential or business connection to New Zealand.

You don’t need to have a certain amount of debt to be eligible for bankruptcy. Once you’ve done your due diligence to decide if bankruptcy is right for you (i.e. you have explored all other options), you need to head to the New Zealand Insolvency and Trustee Services (ITS) website and download an application form. If your application is accepted, the ITS will send your creditors confirmation.

Does bankruptcy clear all debts?

While bankruptcy is often viewed as a “clean slate”, a common misconception is that it clears all of your debts. Declaring bankruptcy does mean that the large majority of your debts will be cleared so you won’t have to pay them after your bankruptcy ends, but there are a few debts that are not included in this.

The following tables show what debts are and aren’t included so you can make an informed choice about whether it’s right for you.

Unsecured loan debt

DebtWill my debt be cleared by bankruptcy?Conditions
Credit cardYes
Store cardYes
Unsecured personal loanYes
Unsecured business loanYes
Trade creditorYes
Payday loanYes
Pawn shop loanYes

You won’t get your pawned item/s back.

Overdrawn accountYes

Secured loan debt

DebtWill my debt be cleared by bankruptcy?Conditions
House mortgageYesYour house is likely to be sold though.
Motor vehicle securityYesYou will have to surrender your vehicle if the account falls into arrears or if the vehicle equity is worth more than the indexed amount.
Secured business loansYesNoYou need to repay the debt or the secured asset may be sold.
Chattel mortgageYesNoYou need to repay the debt or the secured asset may be sold.

Household debt

DebtWill my debt be cleared by bankruptcy?Conditions
Gas, electricity, phone, broadband, pay TVYes

The supplier may choose to no longer supply you or may require a bond.

Outstanding rent where you liveYes

Check local laws to see your tenancy rights – your landlord may be able to terminate your tenancy agreement.

Outstanding rent at a place where you used to liveYes
Debts from a property you damaged as a tenantYes

WINZ, tax, fines, fees and court debts

DebtWill my debt be cleared by bankruptcy?Conditions
Legal feesYes
Medical feesYes
Accounting feesYes
Court finesNo
Non-court finesNo
Court-ordered restitution amountsYesOnly if the amount was fixed before your bankruptcy.

Your wage deductions may continue.

Child supportNo

Doesn’t apply if WINZ was incurred by fraud.

Student loan debtYes

Other debts

DebtWill my debt be cleared by bankruptcy?Conditions
Victims of crimeYesNoIt depends when or if the debt was registered.
Liquidated debts/liquidated damagesYes
Unliquidated debts/unliquidated damagesNo

This is unless the debt is incurred by reason of a contract, promise or breach of trust.

Debts incurred after you enter bankruptcyNo
Provable debts incurred by fraudNo

What are the consequences of being bankrupt?

There are several consequences of becoming bankrupt which you need to seriously consider before you apply to be bankrupted.

  • Length of bankruptcy. You will usually be considered “currently bankrupt” for three years from the day you file your statement of affairs.
  • Income. If you earn over a certain amount you will need to make compulsory payments to your trustees. This amount changes depending on how many dependents you have.
  • Employment. You need to inform your trustee if you change jobs, receive a higher or lower income or stop working.
  • Savings. You can usually save money while you are considered bankrupt but you must keep this money in a normal savings account. If you move these funds to a term deposit or purchase an asset, your trustee can claim it to repay your debts.
  • Insolvency register. While your bankruptcy only lasts for three years, your name will appear on the insolvency for four years after you are discharged.
  • Credit rating. Bankruptcy affects your credit rating, so you will find it difficult to buy things like a car or a house, or be approved for a rental application.
  • Assets. Your trustee is able to sell your assets such as real estate, vehicles, bank balances, tools and lottery winnings. You also need to declare any items you apply for and receive during bankruptcy.
  • Overseas travel. If you want to travel overseas while you’re bankrupt you need to submit an application to the Official Assignee. The Official Assignee doesn’t have to approve your travel and can place restrictions on your travel.

What are the alternatives to bankruptcy?

If you’re considering bankruptcy due to unmanageable debt, make sure you’ve considered your alternatives before you apply:

  • Negotiate directly with your creditors. Contacting your creditors and negotiating with them yourself can be an effective way of getting a handle on your debt. Some things you can negotiate include, more time to pay, a flexible payment arrangement or even a smaller, lump sum payment to settle your debt. Explain your position to your creditors and they may be more willing to negotiate with you.
  • Debt Agreement. While this is a type of bankruptcy, entering into a Debt Agreement is not the full act of declaring bankruptcy.
  • Personal Insolvency Agreement (PIA). This agreement is between you and your creditors and involves a trustee being appointed to take control of your property and making an offer to your creditors. The offer may be to pay part or all of your debts by instalments or in a lump sum.
Go to site