Christchurch earthquake expected to trigger bankruptcy activity. When should you throw in the towel?

By Amanda Morrall

Despite unparalleled economic hardship wrought by the Christchurch earthquakes, personal bankruptcy numbers are surprisingly static -- for now.

Call it the calm before the storm; or in the case of Christchurch the domestic economic after-shock that's waiting in the wings.

With the fate of thousands of business up in the air, hundreds on life-support, Government supports soon to dry up and formerly reliable income streams in doubt, personal bankruptcy numbers are poised to surge.

It's just a matter of time, predicts Robyn Cox, manager of national resources for the Insolvency and Trustee Service.

"People always cope with adversity in the first few months but as that help diminishes, the financial hardships start to flow through the system. My expectation would be that at some point, a certain number of people are going to say: 'There's no way of coping and bankruptcy is the only solution.'"

Despite bankruptcy applications in numbering the low 20s in September, October and November of last year following the Sept.4 earthquake in Christchurch, last month saw only 12 bankruptcy applications trickle in. (For monthly bankruptcy statistics click here).

Cox said it's not surprising the numbers are so low. It wasn't until six months after the financial crisis hit in earnest that bankruptcy numbers began to filter through through in New Zealand.

Cox said she's expecting a similar time lag from the February 22 earthquake. (Click here to see the Insolvency and Trustee Service frequently asked questions on bankruptcy).

For those left jobless and for whom prospects of reemployment are poor, and who've maybe lost a house or business that was either uninsured or underinsured, bankruptcy may be the only choice.

However, Cox and many others who work in this area, encourage individuals contemplating bankruptcy to exhaust every other option first.

Cox outlines three possibilities that could spare an individual the harsh long-term consequences of declaring bankruptcy, which includes a three-year ban on borrowing, travel restrictions, the inability to become self-employed and a permanent black mark on credit ratings.

1) No asset procedure (NAP)

Introduced in December 2007, the no asset procedure applies only to individuals with assets and debts (excluding student loan debt) under NZ$40,000 and including secured indebtedness. Whereas the caveats and handcuffs of the official assignee normally last up to three years, those who go this route are in the clear in 12 months. 

"It's designed to get people back on their feet more quickly,'' said Cox.

"It's a good option for debtors who don't owe too much and it also encourages people to deal with their problems sooner rather than later.''

2) Summary installment order (SIO)

Considered a comprise to bankruptcy, summary installment orders are a negotiated repayment programme whereby debtors can repay creditors an amount within their ability for a period of up to five years. 

Cox describes it as a win-win situation for both creditors and debtors as it allows creditors to recoup some of their losses and debtors to avoid the harsh repercussions of bankruptcy.

3) Other informal options

As it sounds, informal options are negotiated settlements struck between parties usually involving partial debt forgiveness in exchange for repayment of some amount or kind - an outcome that spares the unpleasantness and expensive of legal action.

While Cox concedes the debt pressures may be more than many can bear in Christchurch, she suggest those in a position to exercise one of the above options should do so.

Auckland lawyer Andrew Hooker, a senior associate with Turner Hopkins, agrees bankruptcy should be avoided at all costs.

"I never recommend doing it unless there' s a very serious reason why.''

"The only real reason would be to draw a line in the sand because you're so far in the hole you can't get out.''

Rather than voluntarily declare bankruptcy and put yourself in a financial straight jacket for three years, Hooker suggests letting creditors be the initiators. 

"Obviously it's an undesirable course of action, but you could just see what they do."

'No easy way out'

Authorised financial adviser Nigel Tate, with Tate Financial Planning, also scorns the idea of bankruptcy.

"People look at it as being as easy way out, I encourage people to think beyond themselves and think about the impact on their creditors, they may end up in deep ditch, but they're taking their creditors with them. They need to think about it from the point of view of it being a social responsibility.''

While in some cases, the circumstances leading to a bankruptcy are beyond the control on the individual, Tate reckons many are simply the authors of their own financial misfortune.

"If for example, they chose not to be insured and carried the risk themselves, they need to man up and take responsibility otherwise they're just acting like an insurance company when it tries to decline a claim.''

"Where possible I always counsels clients to work their way through it.''

Accountant and small business consultant Martz Witty said it was hard to give blanket advice on bankruptcy as no two situations were the same.

In general terms, he said the decision to declare bankruptcy would depend on income earning ability and the impact that going into bankruptcy would have on future income earning ability.

In some instances, particularly for those working the financial services sectors or in charities, it could be a career killing move. Bankruptcy would essentially preclude an individul from ever working in the field again, said Witty.

"It would impact on them for a long, long time in the future. For somebody in that position, I'd bite the bullet, take the pain and find another way to get out of debt.''

"The only way I would be advising bankruptcy is where they categorically had no ability to ever repay the debt, and we're seeing situations like that in Christchurch, where they don't have a job, they're not going to get another one, they were uninsured or underinsured and up to their eyeballs in debt.

"Then in that case, whether bankruptcy is going to impact on future earnings or not is irrelevant because they have no other choice."

For further information on bankruptcy and alternative scenarios, see Inland Revenue's website here.