In a recent case a company applied to make a debtor bankrupt for a relatively small debt of $7,000.

The debtor appeared in person at Court for the application. He explained that he was on a sickness benefit and unable to pay.

The judge stood the matter down while the debtor received advice on the no asset procedure.

The no asset procedure is an alternative to bankruptcy. It may be available if a debtor owes between $1,000 and $40,000 and has no realisable assets. The debtor must also be unable to repay any amount towards his/her debts, and must have never previously been through a no asset procedure or bankruptcy.

The no asset procedure imposes certain restrictions, but these are less severe than bankruptcy. For example, a debtor cannot borrow $1,000 or more without letting the lender know that they have entered into a no asset procedure.

For creditors, if a debtor enters into a no asset procedure, the creditor cannot continue to recover or enforce the debt and cannot add further penalties to the debt.

The procedure is designed to help those who are in straitened circumstances. However, it cannot be used to avoid liability for court fines and reparation, child support and maintenance orders, and debts incurred after the no asset procedure is applied for. Overseas debts can also be chased by creditors outside New Zealand as the no asset procedure only applies in New Zealand.

It turned out the debtor was not eligible for the no asset procedure in this case. While the bankruptcy application resulted from a relatively small debt, he owed others money too, and had a student loan – all together too many debts to apply for the no asset procedure.

It is likely that the applying creditor had filed the application for bankruptcy out of frustration.

Once an Order for bankruptcy is made, the creditor goes into a general pool of creditors. The official assignee will distribute any money recovered from the bankrupt proportionately to all creditors (which may mean the creditor cannot recover its full debt). From the date of bankruptcy the creditor is also precluded from adding further penalties or recovery costs to the debt due. It’s not necessarily ideal for the creditor.

For the debtor, bankruptcy imposes a number of restrictions and has a wide-ranging effect. Bankrupts are only allowed to own necessary assets. Bankruptcy also means travel restrictions, and will impact the debtor’s credit record. This will limit where he might find work and who will enter into contracts with him (for say, a tenancy agreement).

Maybe with some early budgeting advice he would have been able to work something out – even a small amount every week can add up quickly. Who knows what the creditor may have accepted had the debtor picked up the phone and entered into a repayment arrangement early on.