Statement of the Problem and the Need for Government Action
The current bankruptcy system imposes sanctions designed to deter individuals from becoming insolvent and bankrupt. However, there is a significant and increasing number of debtors whose circumstances are not adequately dealt with by bankruptcy, the current alternatives to bankruptcy.
There were 1,106 bankrupt beneficiaries for the period 1 July 2000 to 30 June 2001. This was out of a total figure of 2,806 bankrupts during the same period. Their pool of debt consists of utilities, IRD debt, credit card debt and loans from finance companies or banks. These bankrupts are typically termed "consumer bankrupts".
Most of these long-time insolvent debtors avoid bankruptcy by managing their outgoings until some "life event" occurs that interferes with their ability to meet their obligations. In a recent survey of 1,208 bankrupts 472 (39%) identified loss of income or unemployment as the major cause of their bankruptcy. Another significant cause was domestic discord or relationship breakdown.1
As these individuals have a very limited ability to repay any debts, there is often very little action they can take to avoid bankruptcy (i.e. attain an SIO or negotiate a voluntary arrangement to repay the debt over time). The current bankruptcy system imposes sanctions designed to deter individuals from becoming insolvent and bankrupt. Therefore, the punitive restrictions of bankruptcy, in these circumstances, are not commensurate with the level of fault on the part of the debtor. Many of the conditions of bankruptcy, such as restrictions on being in business or travelling overseas, may have little or no relevance to these bankrupts.
The key cost to the economy arises out of personal costs borne by the individual and their family. There is little incentive for bankrupts to better their financial situation during the term of bankruptcy as any after acquired property (including wages) are vested in the OA. Combined with the social and financial stigma of being bankrupt, this can often lead to lowered self esteem and productivity within the economy.
A further problem for those involved in personal bankruptcies is age and lack clarity of some parts of the Insolvency Act 1967. The Act contains a number of little used provisions that do not accord with modern administrative practice. It also conflicts with more recent legislation, such as the Bill of Rights Act 1990 and the Privacy Act 1993 in a number of areas.
1Saunders, Lynn, "Consumer Bankruptcy" June 2002 article on the NZITS website.
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