As a debtor, you owe money to the people who lend it to you (your creditors). It is your responsibility to pay back what you owe them. However, financial difficulties may prevent you from repaying what is due to your creditors. When you are insolvent, the law provides various ways to repay creditors. The most intensive is bankruptcy, where your debt is cleared, and the Official Assignee sells your assets to pay back your creditors. It is also the most restrictive option. But, if you can come to an agreement with your creditors, then you could be eligible for a creditor’s proposal. This is an alternative way of dealing with your debt. This article will outline what a creditor’s proposal is and how it works in New Zealand.

When you are insolvent, then:

What Is a Creditor’s Proposal?

A creditor’s proposal is a formal compromise between you and your creditors. It is an alternative to Insolvency and Trustee Services (ITS), like a no-asset procedure or debt repayment order.

Essentially, you (the insolvent party) draft an agreement with your creditors that outlines a debt management plan. When drafting this agreement, it is best practice to engage a lawyer or other insolvency specialist. Over half of your creditors need to agree to this plan. Those who agree need to make up more than 75% of your outstanding debt.

The Court must approve this plan as well. The procedure outlined in your proposal usually lasts for three to five years. At the end of this period, you write off any remaining debt. Your proposal may include offers to:

  • assign your property a trustee, to hold for the benefit of your creditors;
  • pay back your debt in instalments;
  • repay your debts by or at a future date; or
  • arrange any other kind of plan for paying back your creditors.

A creditor’s proposal will best suit you if you have a steady income for making regular instalments for paying back your debt. Alternatively, it is also suitable if you have assets that you can reasonably sell off and give the proceeds to your creditors. Usually, you would appoint a licensed insolvency trustee to oversee this process. You can only enter into a creditor’s proposal if your creditors agree and if they would be in a better position using this plan rather than a bankruptcy proceeding.

Benefits of a Creditor’s Proposal

A creditor’s proposal is ideal because it is less restrictive than bankruptcy. If you are a small business owner or company director, you can still continue trading and earning an income. This can be an excellent benefit for you in terms of paying back your creditors, which may be a better position for them. As an alternative to bankruptcy, other advantages include:

  • you are still able to leave the country;
  • your name does not appear on the public register for bankruptcy;
  • the local newspaper and NZ Gazette do not advertise your insolvency;
  • you do not need to involve the Official Assignee; and
  • once the Court approves the proposal, creditors cannot claim debt during the proposal period outside of what you already agreed on.

How Do I Enter Into a Creditor’s Proposal?

You can file a creditor’s proposal at the office of your local court. The first step is to draft an agreement with a lawyer or other insolvency specialist. You should also choose the person you want as your trustee in this process. They will oversee the selling of your assets, and administer it to your creditors as appropriate. It is their job to file a summary of receipt and payments every six months with the court. Creditors will deal with them once the proposal is active and should not contact you directly.

On top of the proposal and agreement you draft, you need to include a:

  • statement of affairs, with a summary of your debts and liabilities;
  • background statement that also identifies your trustee; and
  • an affidavit verifying all of these.

Once you file the proposal, the trustee then calls the creditors’ meeting.

The Creditors’ Meeting

The trustee will contact every creditor, and arrange a time and place to hold a meeting. Each creditor will also receive a:

  • copy of the proposal;
  • statement of your assets and liabilities;
  • formal proof of your debt; and
  • voting letter (in its prescribed form) to fill out if they cannot attend the meeting.

At the meeting, creditors will discuss the proposal with your trustee, and negotiate or ask for any modifications. These would only be valid if you agree to them. Then they vote, and if there is a majority, the proposal goes for court approval. The court will hear any objections from creditors and decide on the matter.

Key Takeaways

If you are on good terms with your creditors, then a creditor’s proposal may be a viable option for you if you are insolvent. It does not have the same restrictions as bankruptcy, so you can still conduct business and earn an income. This can be an excellent benefit for paying back your debts. If you would like more information or help drafting your creditor’s proposal, contact LegalVision’s New Zealand disputes lawyers on 0800 005 570 or fill out the form on this page.

FAQs

What is insolvency?

Insolvency is a legal term that describes when you are in debt. This means that you cannot pay your debts when they are due, or the sum of your debts is larger than the sum of your total assets.

What are creditors?

Creditors are the people that you owe money to. If you are insolvent, they can apply to have you declared bankrupt. This also means that they bring legal proceedings against you, depending on the situation.

What is a creditor’s proposal?

A creditor’s proposal is an agreement that you draft with your lawyer that outlines a debt repayment plan. This could be in instalments, or you could use the proceeds from selling your assets. Both your creditors and the court have to approve this proposal.

What is the difference between a creditor’s proposal and bankruptcy?

A creditor’s proposal is a formal alternative to bankruptcy that could be available if you are still on good terms with your creditors. It is less restrictive and not publicised. You have to formulate a plan for paying back your debt, which your creditors need to approve.

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