KEY POINTS:
Kiwis are drowning in debt, the Ministry of Economic Development has confirmed, as bankruptcies have hit an all-time high.
The Official Assignee administered 3806 insolvency procedures in the 2008 financial year - up from 3593 in the preceding term.
Last July, 325 people went bankrupt compared with 475 people who became officially insolvent in the same month this year.
Cristian Pardo, of the Ministry's Insolvency and Trustee Service, says the introduction of the No Asset Procedure (NAP) regime in December accounts for the sharp statistical rise in insolvency procedures - comprising bankruptcy, NAP and summary instalment orders.
People with debts of less than $40,000 and who have no realisable assets can be accepted into this procedure, which lasts 12 months - while bankruptcy stretches over at least three years.
John Roberts, country director of Veda Advantage, says NAP has been designed as an alternative to the more punitive bankruptcy path for people who had unintentionally got themselves into a financially insolvent situation, for example through sickness, marriage break-up or unemployment.
The introduction of NAPs has contributed to a shift in societal attitudes by lessening the gravity of declaring bankruptcy, insolvency lawyer Mark Lowndes says.
Financial adviser Liz Koh says the scheme makes it "easier for people to walk away from their debts and be back again within a 12-month period".
But successful veteran property investor John May says the rising bankruptcy rate's primary driver is that people's indebtedness levels have soared, particularly during the past three years when the country has been through an economic boom. This becomes a recipe for disaster as living costs and mortgage payments increase until people can't meet commitments.
"People's budgets are just not matching the reality of expenses."
May says present conditions are reminiscent of the last economic crash, only potentially a lot worse.
Bankruptcies frequently follow mortgagee sales when there is a shortfall - and he says we have only seen the tip of the iceberg.
Lowndes agrees bankruptcy figures will continue to climb significantly for the next 12 months, pointing to the easy availability of consumer credit as a major driver.
Those who have taken up no-deposit, interest-free loans are facing "the day of reckoning" once the payment holiday ends, Roberts says.
Another leading indicator of financial stress he is seeing is an increase in defaults loaded on people's credit files.
Ministry figures for the 12 months to August 31 indicate consumer debt is a greater cause of bankruptcy than that stemming from commercial failure, with 466 people having been in business in the 12 months before entering an insolvency procedure compared with 2936 who were not.
But there is also plenty of commercial grief to come through, says Lowndes. Increased business activity increases business failure rates - economic booms don't protect people from inexperience, or things not turning out as planned. "Inevitably in entrepreneurial activity, decisions with risks attached don't always turn out for the best."
He says there's "a real sense of deja vu" in his job. "We did a lot of insolvency work in the late 80s and early 90s. It's human nature that when you have a prolonged period of good times, people's ability to weigh up risk and reward gets out of kilter... they turn a blind eye to the risk."
Many people have used their properties to secure money lent to fund their businesses.
Now values have dropped and increasing numbers of people living month-to-month on their incomes can't make their repayments.
Business failures trigger the crystallisation of personal guarantees, and failure to meet those obligations results in bankruptcy.
CASE STUDY
Suzanne Paul was devastated on being declared bankrupt in 2005. "It feels like the end of the world."
For optimists such as Paul, it is a hard to give up on floundering ventures, such as the Rawaka Maori cultural centre for tourists in Auckland's Northcote, which brought her to grief.
Having no assets protected by a trust, Paul lost everything - house, car, business - and was left virtually penniless. But worse than this, she says, was her loss of confidence, self-respect and hope for the future.
"How do you start again if you haven't got anything? You're really trying to persuade other people to trust in you again."
The prospect of starting again inevitably plunges people into depression, Paul says, but she confronted her fear of failure through the process.
"People look on failure as being the end of the journey and it's not," she says. "You can pick yourself up, but it's not easy."
Paul is coming out the other side of the three-year bankruptcy term and says her heart goes out to older people who have lost money through finance company failures. "They must be in the depths of despair."
Paul fell back on re-launching her successful Natural Glow product, and advises making a plan to move forward and writing it down.
She has now written a book, But Wait There's More, explaining how she moved on from the experience.
