Regulation slashes bankruptcy rates

Regulation slashes bankruptcy rates

The introduction of the No Assets Procedure as an option in personal insolvency cases looks to be resulting in far fewer people being made bankrupt.

Nearly 1,300 bankruptcies were recorded against debt managed by collection agency Baycorp in the first half of 2010. The figure compares to 6,000 cases of bankruptcy in 2009.

The No Assets Procedure (NAP) option is for debtors who are unable to pay their debts and came in to force in 2009. It is designed to provide debtors experiencing financial difficulty with an alternative to bankruptcy.

Unlike bankruptcy however, which stays on a creditor’s record for up to seven years, the NAP is wiped after four years and he or she can typically apply for credit again after only one year. When a debtor enters a NAP, the debt is frozen on the date of entry and wiped on discharge.

Baycorp CEO Geoff Harper says while it’s pleasing to see a reduction in the rate of bankruptcies, the NAP regulation puts more pressure on businesses to regularly check credit records.

“Businesses need to be more alert to the fact that there are many more consumers out there today who in previous years could have been made bankrupt. Credit managers certainly need to be on their toes.”

The decrease in bankruptcies however has seen a converse increase in legal action in an effort to recover money owed to creditors. In the first half of this year, Baycorp has pursued legal action in almost as many cases as it did in 2009.

Mr Harper says to collect what they are owed, clients have been a lot less averse to taking legal action.

“The recession has played a big part in creditors taking firmer action to prevent debtors defaulting in the first place,” Mr Harper says. “This includes things such as tightening credit policies and working the debt harder themselves before calling us in.

“Often by the time the debt arrives on our desks there is a need for stronger action and I suspect that’s the primary reason for the increase in legal action.”

Baycorp figures show Wellington remains a hotbed of bankruptcies with 43 per cent of the national level so far this year. Palmerston North is second with nearly 20 per cent while Auckland had 15 per cent.

Gisborne however leads the country in the number of cases in which legal action has been used to recover debt so far in 2010 followed by Auckland and Rotorua.

Other figures released by Baycorp show (for the six months to June 30, 2010):
• Wellingtonians are being pursued for debts at almost twice the rate of Aucklanders
• Taranaki debtors are the third most New Zealanders behind with their payments.
• Nationally, Hawkes Bay and Northland debtors owe the least.
• Bankruptcies are evenly spread across most age groups but people older than 56 years are generally less likely to be declared bankrupt. The number of bankruptcies for those older than 65 was only 0.84 per cent of the national figure compared to 22 per cent for 36 to 45s and 16.3 per cent for 18 to 25s.
• During the past year there has been a large increase in the average dollar value of accounts referred to Baycorp by creditors in:
o finance ($9,175),
o health ($1,786),
o retail ($4,649) and
o media ($1,240).
• The highest debt collection rates (ratio of funds collected to those owing) are in the insurance (42%), education (43%) and media (43%) industries. Finance (12%) and health (17%) have the lowest.
• The average debt value for 18 to 25 year-olds (down $50 to $579) and 26 to 25s (down $54 to $760) decreased while that of 56 to 65s increased to $1,109 from $981.

Based in Australia, Mr Harper is in New Zealand to attend Baycorp’s Trans-Tasman sales conference focusing on opportunities associated with growing business confidence in the wake of the recession.

“Although we can see a business shift in attitude towards a more positive financial outlook, there is still some way to go. We are saying clients should remain cautious and continue to keep up the good practices that they have put in place. The new optimism needs some caution.”

ENDS

© Scoop Media