Should you go bankrupt?

Your finances are a dog’s breakfast. You think you have no hope of ever paying off your debts. Should you go bankrupt?

The answer is: “it depends”. First of all, bankruptcy isn’t the only option. In New Zealand we also have the no asset procedure (NAP) to clear up to $40,000 of debts.

Insolvency (NAP or bankruptcy) is sometimes seen as Gen Y’s friend. It gives young people the chance to walk away from mistakes and start again.

For others insolvency is a foe that should be avoided at all cost. Although it’s wiped clean from the slate after five years for NAP and seven years for bankruptcy, insolvency can follow you around like a bad smell affecting your future chances of buying a house or car or getting a job. It is not quite a get out of jail free card that it might appear.

There are times when it’s right to choose insolvency. Perhaps the debts are large and have come about suddenly. It may be that you’ve caused an accident that wrote off a $38,000 car and it would pay years to pay the other driver’s insurance company back. If you can live without going overseas for a number of years, running a business or getting credit, then insolvency might be for you.

Before deciding, however, consider these seven key points:

1. Don’t make a decision until you have seen a budget adviser. They can sometimes negotiate the debt down on your behalf, which might make repayments possible.
2. Banks, employers, and insurance companies ask on their application forms whether you’ve ever been insolvent and are free to make judgements on your credit worthiness, employability, or insurability as a result.
3. Some debts don’t go away with insolvency. For example child support and maintenance orders, court fines, student loans, and reparation aren’t cleared. What’s more, the Official Assignee has the power to take some of your wages while you’re in insolvency to pay back debts. It may also be able to take your KiwiSaver savings. If you stop paying an HP during NAP, the finance company can still repossess the goods or car.
4. You can only use NAP once. People who have got into financial trouble by spending too much on their lifestyle will end up in trouble again unless they change their ways. Sometimes learning from the grind of paying off debt may be more useful long term than walking away.
5. If you inherit money while insolvent it can be taken off you to repay your debts.
6. Unlike the United States of America, where bankruptcy can be seen akin to a business apprenticeship, there is strong public feeling against bankrupts here. Having said that, some people overcome this and move on. Infomercial queen Suzanne Paul is a classic example.
7. You are impacting other people by not paying back debt – especially if it’s owed to small businesses. That can be a moral hazard.

Finally. Don’t give up hope. Some people manage to pay back tens of thousands of dollars in debt and start again without becoming insolvent. If you just need breathing space go to the Insolvency and Trustee Service for a summary instalment order, which keeps your creditors off your back while you pay off the debt.

Your say: Is the no asset procedure a cop out? Or is it giving Gen Y and other generations a fresh start?

Links

Life after university. Paying off student debt

Gen Y. Your financial mistakes could cost you later in life

The long arm of the tax man

Eight things you need to know about your credit record

Mental health and your finances