Treat bankruptcy as 'last resort' - financial adviser

The number of people being made bankrupt has fallen sharply over the past decade, although there are warnings more trouble may lie ahead.

Data shows that from a peak of about 2000 a year through 2014 to 2016, the number of people being adjudicated bankrupt per year dropped to a low of 525 in 2022. It has picked up a little since then, to 629 in the year to the end of June.

Debtfix co-founder Christine Liggins said people were realising there were other options.

The not-for-profit organisation helps people with problem debt and assists about 3000 people a year. Last year, it cleared roughly $20 million of debt for clients.

Read more:

• The Detail: More economic pain ahead
• Economic recovery: Is this time different?
• Here's where the economic downturn has hit hardest

Liggins said she encouraged clients not to pursue bankruptcy except in cases where debt was having an impact on their mental health, because of the potential consequences of bankruptcy.

Clients had on average $80,000 to $100,000 of typically retail debt, she said, but were usually working so they were able to develop a plan to pay it back.

"We have been raising awareness that there are other options to bankruptcy ... bankruptcy doesn't help anybody at all.

"The creditor gets very little, the client is penalised for seven years and beyond, and the Official Assignee gets the lion's share... it's absolutely the last resort."

Financial mentor Shula Newland said the drop in bankruptcy could also be caused by people using their KiwiSaver funds to help meet debt payments.

The number of people making withdrawals from KiwiSaver for financial hardship reasons had increased in recent years. In July 2024, 4160 people withdrew for this reason, almost twice the number of 2023.

Massey University banking expert Claire Matthews agreed KiwiSaver could be part of the picture.

"In some cases, balances may be sufficient to cover the debts and prevent bankruptcy, but in other cases it may simply provide breathing space for the borrower so they can cope with what's left."

Matthews said the fact that debtor applications - where people applied to have themselves made bankrupt - had fallen from 71 percent of all bankruptcies in 2019/2020 to just 57 percent in the most recent year could indicate people were seeking or receiving more support to sort their finances without resorting to bankruptcy.

Liggins said KiwiSaver could help but it cannot be used to pay off debt unless it is in arrears.

"I think it's many things together, including after Covid many creditors realised they needed to be empathetic to the situation rather than pulling the plug too early."

Inland Revenue, in particular, had been softer in its approach in recent years, she said, although its tone has changed again recently.

Good Shepherd chief executive Emma Saunders said it seemed responsible lending regulations - introduced as part of the Credit Contracts and Consumer Finance Act (CCCFA) - might have helped people avoid harm in recent years but the economic environment now was making things tougher.

"This is in part why we're nervous about the current easing of the affordability regulations. We already see the results of high-cost lending that stretches the view of 'affordable' and 'suitable', and fear we'll see a lot more harm as regulations are eased.

"The role and resourcing of enforcement agencies will be crucial to mitigate risk, alongside social services such as Good Shepherd supporting those at risk or harmed by high-cost debt. "

Insolvency practitioner Damien Grant said it was likely numbers would pick up from here.

"We are going to see an increase in bankruptcies because economic times are getting tighter, interest rates will be pushing people."

Economist Shamubeel Eaqub said previously corporate and personal insolvencies were quite correlated but that was not the case any more.

It could be that the responsible lending rules had pushed lower-income people out of some financial services, he said.

"For all the issues of CCCFA, it might be saving banks and finance companies a lot of bad debt right now, because they didn't lend to poor people. But it might also mean that poor people have been without accessible and affordable credit for too long.

"I think there's something bigger going on - I just don't think people who are poor are accessing financial services in the same way."

Eaqub said the downturn had so far been led by a profit slump for businesses, rather than jobs and incomes, although that was changing quite rapidly now.

"Insolvencies, NAPs and DROs are lagging indicator… The overall trend has been down but over the last two years it has been up… my fear is we now have job losses starting to bite.

"What does that mean? When people don't have a job they will not have the income to make the minimum payments and things like that. You can't restructure your debt if you have no income potential."

Corporate insolvencies increased from 58 in 2020 to 92 in 2022, 251 in 2023 and 381 in the most recent year.

No-asset procedures (NAPs), which are designed for people with smaller debts, have followed a similar trend but peaked later and have yet to increase again.