Hundreds of people are caught in a trap of perpetual bankruptcy, many simply because they have failed to fill in the right forms.
Though bankruptcy should last for only three years, Christine Liggins from debt rescue service Debtfix has identified hundreds of people who have been bankrupted for far longer, including many who have been bankrupt for more than 10 years.
As of late March just over 470 people had been bankrupt for more than 10 years, the Insolvency register showed, including a handful of dead people.
Nearly 1400 people had been bankrupt for more than four years, Liggins discovered.
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The Official Assignee, which manages bankruptcies, said the Insolvency Act only allowed it to release people from bankruptcy three years after they had completed a “statement of affairs”.
Liggins said it was too easy for people with poor language skills and education, who did not understand bankruptcy laws and requirements, to fall into long-term bankruptcy by failing to fill in the required forms, and start their three-year bankruptcy clock.
Liggins had even encountered one bankrupt who did not know he was bankrupted.
“I worked with one man who did not believe he was bankrupt. I had to show him his name on the Insolvency register,” Liggins said.
Insolvency Service figures indicate Māori and Pasifika people are not significantly more likely to be bankrupted than other ethnic groups, though its ethnicity data is incomplete.
Liggins was alerted to effectively perpetual bankruptcies by the cases of two Māori men who came to her for help.
Many of the longest-serving current bankrupts on the Insolvency register have Māori and Pasifika names, but without detailed ethnicity data, it is impossible to tell whether the two ethnic groups are over-represented, she said.
Liggins is campaigning for changes to the Insolvency Act, which the Ministry of Business, Innovation and Employment has told the Government is “punitive and has not been reviewed since 2006”.
The shaming of bankrupts through the public Insolvency register, and bankrupts being stripped of their ability to contest debts through the courts, were both aspects of bankruptcy which not even criminals faced, Liggins said.
Bankruptcy carried a stigma even when it was the result of illness, job loss, or injury, and the Insolvency register of bankrupts subjected people to public shaming, she said.
It could be used as a “weapon of mass destruction” by creditors to crush, and silence debtors, Liggins said.
One currently bankrupted Auckland woman told Stuff the debts she was bankrupted for were incurred in her name from an unregistered lender by a body corporate to fix a leaky building complex in which she owned a unit.
She said she had tried and failed to overturn the debts, which she believed to be illegal, through the courts, but that bid had ended after she was bankrupted.
She felt bankruptcy had stripped her of dignity, and resulted in her being homeless.
“It’s publicly humiliating. It’s pushed me into renting. I’m living in a basement, getting $445 a week, of which $300 goes on rent,” she said.
The ordeal had taken a toll on her mental health, and though she was a skilled professional, she was not working, she said.
Working while bankrupted for debts she did not believe were fairly taken out in her name was hard to face, with all but bare living expenses taken to pay down the debts, and the Official Assignee’s fees, she said.
“It’s like I’m their slave,” she said.
Russell Fildes, national manager for insolvency and trustees services at the Official Assignee, said: “The Insolvency Act states that a bankrupt wouldn’t be discharged until three years after a statement of affairs was filed.
“If a statement of affairs was not received then the person wouldn’t be discharged,” Fildes said.
“Each of these people have an insolvency officer assigned to them who will attempt to contact the person and discuss their obligations including filing a statement of affairs and follow up in writing during the bankruptcy administration,” he said.
Liggins called for a complete overhaul of personal insolvency law, so people could only be bankrupted if courts decided it was in the public interest to do so.
All other debtors who were defeated by their debts should have their affairs administered by an inquisitorial debt resolution service, based around Scotland’s Debt Arrangement Scheme, she said.
Liggins said this scheme would have the ability to enquire into the legality of people’s debts, which might have helped the bankrupted Auckland woman.
Sometimes people failed to defend themselves in the High Court when a creditor sought to bankrupt them, Liggins said.
She said she had seen cases were people had been bankrupted over debts that may not have been enforceable.
In 2017, it was revealed some lenders illegally inflated debts in claims to the courts. Evidence from the Commerce Commission presented in the High Court in Auckland showed some lenders had taken advantage of the court system when they believed debtors would not contest the claim.
Such a system would also prevent people from becoming effectively perpetual bankrupts, Liggins said.
Ronji Tanielu from the Salvation Army’s social policy and Parliamentary unit, said long-term bankruptcy would have an impact on people’s lives, and called on the Government to change the law, if it was resulting in people falling into perpetual bankruptcy.
Jake Lilley, from budgeting network Fincap said: “It just adds to the list of inappropriate consequences associated with bankruptcy, or insolvency.”
Insolvency was needed to deal with some people’s debts, but bankruptcy could make it hard to get essential services like power at home, or a bank account, Lilley said.
“It’s hard to get a power contract, and you could end up on prepay, and if you don’t have any money, you end up without power to heat your home, or cook,” he said.
“We want to see some action to make sure that insolvency can be used, and not have ridiculous consequences.”
He called on the Official Assignee to locate the long-term bankrupts, and work with them to end their bankruptcies.
Fildes said New Zealand’s equivalent of Scotland’s scheme was the Debt Repayment Order.
“It’s a system where if someone owes less than $50,000, and they can make an ongoing payment to their creditors, to pay all or a percentage of their debt over a three-year period,” he said.
Despite that, Official Assignee figures show one-in-five bankrupts owed less than $50,000 when they were bankrupted.