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Dealing with debt is a stressful and straining process, particularly when you do not have extensive experience in such areas. There can be a lot of paperwork and a lot of jargon that you may not initially understand. Insolvency and bankruptcy are two key concepts when dealing with debts. It is crucial that you understand what they are and how they affect you as a business owner. Therefore, this article will explain the difference between insolvency and bankruptcy in New Zealand.

Managing Debt 

Starting a new business can be a risky venture, and you might operate at a loss in the beginning. Smart dealing with finances and asset management is key and can go a long way towards avoiding piling debts and payments. However, if your debts keep racking up, dealing with them can be an overwhelming task. If you find yourself in this situation, you need to gain an overall view of the situation by calculating your total debt. Doing so can help you:

  • calculate how long until you can repay it;
  • determine what options you can take advantage of; and
  • obtain the correct help from the right places.

Notably, if you run a company, you generally will not take on your company’s debts. An exception will be if you have made a personal guarantee. Therefore, in most cases, your company is responsible for paying debts back. Furthermore, if your company is unable to do this, it may go into liquidation or receivership.

However, if you run a business in your personal capacity, you take on the business’ debts as your own. This will be the case if you operate as a sole trader or use a partnership structure. As a result, your personal assets and funds are at risk.

When dealing with large quantities of debt, you should seek professional financial or legal advice to help determine your best path moving forward. 

If you find yourself facing large quantities of debt, it is important to see what options you have for repayments. For instance, this could include personally developing a payment proposal plan with your creditors or relying on hardship funds/applications. However, if things are dire, then insolvency is an option.

What Is Insolvency?

‘Insolvency’ is a legal term that indicates you cannot pay the debts you owe. It can also indicate that your total debt is higher than your overall assets. For instance, you can be personally insolvent. Additionally, your business can be insolvent when it cannot pay the debts it owes its creditors. A potential list of creditors might include:

  • Inland Revenue;
  • banks;
  • your suppliers;
  • landlords;
  • your employees; and 
  • contractors.

When you are personally insolvent, the Official Assignee (part of the Insolvency and Trustee Service (ITS) in New Zealand) manages various debt repayment methods. 

The table below sets out three main debt repayment options: 

Debt Repayment Option


Debt repayment orders

A formal repayment plan which a government official will help you manage

No-asset procedures

Clears your debts as a one-off for 12 months, but you lose ownership over the majority of your assets


Clears your debts, but you lose control of your assets and have various restrictions

The facts of your situation (such as the amount you have owing) will determine what options you can choose. All of these options will have long term effects, so you need to be mindful of their full consequences. When applying to the Official Assignee for one of these procedures, they will advise you on what they think is appropriate.

What Is Bankruptcy?

While insolvency refers to a particular financial situation where you cannot pay your debts, bankruptcy is a formal legal process that manages those debts. The process of bankruptcy also imposes various restrictions on you as a bankrupt. You can apply for bankruptcy if you have debts of $1,000, and someone to whom you owe money of that amount can do the same. If your unsecured debt is over $50,000, bankruptcy is your only option when you are insolvent. 

Crucially, if you declare bankruptcy, you do not have to pay your debts. However, you must face the consequences of bankruptcy as well. These include:

  • needing permission to leave New Zealand;
  • transferring ownership of your property to the Official Assignee, with some exceptions;
  • having this record on your credit file for five years, which can affect your borrowing success;
  • still needing to pay some kinds of debts, such as court fines and child support;
  • needing permission to run a business;
  • needing permission to have a relative employ you; and
  • having your name published in your local newspaper, on the ITS website, and in the New Zealand Gazette.

Key Takeaways

To sum up, insolvency refers to a financial situation where you cannot pay back your debts or they are greater than the total value of your assets. Bankruptcy is a formal legal state that you can apply for to deal with insolvency, and it is one option of many. However, you need to carefully consider your situation before declaring bankruptcy, as it can have long-term effects that can negatively impact your commercial activity. If you would like more information or help with insolvency, contact LegalVision’s disputes and litigation lawyers on 0800 005 570 or fill out the form on this page.

Frequently Asked Questions

What is insolvency?

Insolvency refers to when you are unable to pay back your debts or the total sum of your debts is higher than the combined value of your assets. If you are insolvent, you can undertake various formal insolvency procedures.

What is bankruptcy?

Bankruptcy refers to a particular insolvency procedure. When you declare bankruptcy, you do not have to pay your debts. However, you will have restrictions on what commercial activity you can engage in for three years.

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