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When you cannot pay your debts, there are various options that you can choose from to manage your financial situation. Many of these involve selling or redistributing your property. However, if you choose to undergo a formal insolvency procedure, you may lose some control over your property. This article will explain how your property is divided if you are insolvent in New Zealand.

What is Insolvency?

Insolvency refers to a particular financial state where you cannot pay back your debts or your total debt is larger than the total value of your assets. If your business becomes insolvent and cannot pay its debts, you may be personally responsible for those debts, depending on your business structure. In these cases, your personal property, such as your house or personal accounts, may be at risk. The table below gives a breakdown of business structure and responsibility when your business becomes insolvent.

Sole TraderAs the business owner, you are solely responsible for the business debts.
PartnershipYou and your partners are jointly responsible for business debts. If you cannot get a hold of the other partners, then you alone will be responsible for repayment.
CompanyThe company itself is responsible for business debts. However, if you have made a personal guarantee, you may be personally responsible for those debts. 

When you are insolvent, you should seek legal or financial advice from a professional to help determine how to pay back your debts. They may be able to help you find ways of repaying your debts without engaging in any formal legal action, such as negotiating with your creditors (the people who you owe money to).

However, if you have exhausted all other options, you can apply to the New Zealand Insolvency and Trustee Service (ITS). They manage personal insolvency options, as well as some company ones. Through them and the Official Assignee, you may begin a formal insolvency procedure to resolve your debt. For personal insolvency, these include:

  • no-asset procedures;
  • debt repayment orders; and 
  • bankruptcy.

For an insolvent company, these include:

  • liquidation;
  • receivership; or
  • voluntary administration.

Notably, the Official Assignee only deals with liquidation and only when the Court directs them to. 

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What Happens to My Property?

What happens to your property will depend on how you deal with that insolvency when you become insolvent. Different insolvency procedures deal with property in different ways. The table below sets out some of these personal insolvency procedures and how they deal with property.

Debt Repayment OrderThis is a formal debt repayment plan with creditors. This procedure is best when you can pay back some debt and your total is under $50,000. You are still in control of your property and income, but you may sell your assets to pay back debt.
BankruptcyThis procedure relieves you of your debts, but imposes various restrictions in return. If your total debts add to over $50,000, this is your only insolvency option. While bankrupt, all of your property transfers to the Official Assignee, with some exceptions.
No-Asset ProcedureThis procedure is a one-off alternative to bankruptcy that works similarly. This is best for debts between $1000 and under $50,000, and when you have no assets or extra money. These assets do not include some property, such as necessary household furniture and effects, which you get to keep. This procedure clears your debts but imposes restrictions. Crucially, you cannot enter this procedure if you have sellable property.

What Does the Official Assignee Do With My Property?

Your company may be insolvent and undertaking one of the above procedures. In these cases, generally the person supervising the proceedings (or shareholders) will determine what happens to the company’s assets. They may decide to sell them or transfer them to creditors.

What Property Do I Retain?

When you are bankrupt, you do retain some property up to a certain value. These include:

  • necessary trade tools;
  • furniture and effects;
  • a motor vehicle worth up to $6,500;
  • money up to $1,300; and
  • items on hire purchase, which you will need to keep making payments for.

How Does the Official Assignee Divide My Property?

The Official Assignee is in charge of the entire process, including selling your property to pay back your creditors. How they divide specific property or incomes will depend on:

  • the nature of the debt, such as whether it is secured or unsecured;
  • whether you or a creditor started the bankruptcy process;
  • who the creditors are;
  • the value of the asset; and
  • the nature of the asset itself.

For example, if you owe a debt to a creditor with machinery as the security, they can repossess the machinery and sell it themselves. Otherwise, the Official Assignee will distribute any income from sales as appropriate.

Some creditors will have a higher priority than others, such as a creditor that applied to the Court for bankruptcy proceedings. Additionally, employees with unpaid wages will also qualify as creditors, and some of the funds from asset sales will go towards paying them. Notably, general unsecured creditors will be of a lesser priority than these parties.

Key Takeaways

In some formal insolvency procedures, you are able to retain control over your property, but you may have to sell some of it for repayment. In others, you may transfer control to the Official Assignee, who is in charge of selling your assets to pay back creditors, who will be paid back according to their priority. If you would like more information or help with property and insolvency, contact LegalVision’s New Zealand disputes lawyers on 0800 005 570 or fill out the form on this page.

Frequently Asked Questions

What is insolvency?

Insolvency is a financial state where you cannot pay back your debts or your total debts are higher than the value of your total assets. In these cases, you need to find a way to repay or creditors or undertake a formal insolvency procedure.

Who is the Official Assignee?

The Official Assignee is a part of the Insolvency and Tenancy Service, and oversees various insolvency procedures.

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