Debt Recovery Options in New Zealand

Someone owes you money on a contract for goods or services. You call your debtor and send letters but remain unpaid. Then what?

You could have security such as a lien, registered interest on the Personal Property Securities Register, mortgage or other charge. If so, you could leverage that security to recover the debt and, you would expect, your costs as well.

If you don’t have security, or if your security doesn’t cover all the debt, then your options could include writing it off, selling it, engaging a collection agency, listing the default with a credit reporting agency or engaging a lawyer. Profile, cost and image are relevant to your decision, but keep in mind that your options might be quite different if employment, motor vehicles, residential tenancies or other special factors are present.

Profiling assesses characteristics of the debt and the debtor including type, face value, whereabouts and financial means. The exercise should give you some idea of which option might be most effective.

Writing off debt isn’t fun but can be the best way out of a bad situation: You don’t throw good money after bad and you’re not seen to be squeezing someone down on their luck. On the other hand, some don’t think they could survive in their marketplace with a reputation for being soft.

A collection agency might buy your debt for a fraction of its face value or collect it on commission. Sale can be a good way to clear bad debt, but watch out for buyback clauses. Collection on commission can involve duplicating the kinds of calls and letters you have already made, but professional negotiators can make all the difference.

Debtor contact typically escalates from the constructive “let’s work together to resolve this debt” to the threatening “pay or else”, with the ‘or else’ being listing with a credit reporting agency, legal action or both.

Listing with a credit reporting agency might get the debt paid eventually because it can negatively impact your debtor. It can be hard to obtain new credit while the listing remains, driving the debtor to account to you.

A lawyer’s involvement can be as limited as negotiating with your debtor over the phone or writing a letter. Beyond that your options can depend on whether the debtor is a corporation or a real person.

If the debtor is a corporation without a setoff, and the debt is undisputed, liquidated and over $1,000 then a statutory demand could be appropriate. This requires the debtor to settle the debt within 15 working days, and if not you can issue liquidation proceedings on the basis your debtor is insolvent.

The cost of a statutory demand is usually in the vicinity of $650 including GST and disbursements such as process service charges.

Liquidation proceedings involve filing in the High Court, service on the debtor and advertising in two publications. Costs and disbursements can range from $3,000 to $5,000 depending on the circumstances.

If liquidators are appointed they will realise your debtor’s assets and distribute funds in an order of priority. Liquidator’s fees, costs for the liquidation proceeding, wages, tax and secured creditors are paid before unsecured creditors. Consequently, as an unsecured creditor (in this scenario) you would have little hope of recovering much more than your costs.

However, if the liquidator finds a likely cause of action against directors, shareholders or third parties they may invite you into a creditor’s funding agreement where you cover their costs in exchange for priority on funds recovered.

If a statutory demand isn’t appropriate, or if your debtor is a person rather than a company, then going to Court for your debt (plus interest and legal costs) could be your last remaining option.

The Disputes Tribunal deals with disputes of up to $15,000, which can be extended to $20,000 by agreement. This can be a cost-effective option because filing fees start from only $36.30 and lawyers are not allowed to represent you. However, if there is no actual dispute then you have to make your claim in the District Court.

The District Court deals with claims of up to $200,000, and the High Court with claims above that. The costs escalate with the jurisdiction - obtaining judgment in an unopposed District Court claim can cost less than $1,000 where the High Court equivalent would be significantly more.

Costs also increase where your debtor disputes your claim, but are usually awarded in your favour if successful. This is discretionary however, and you may be awarded less than you actually incur.

A range of enforcement options become available when you get judgment. You could apply to have your debtor examined by the court, put a charging order on property, issue a statutory demand when you couldn’t before and apply for a bankruptcy notice or distress warrant.

Charging orders on land, orders for examination where debtors have no land and bankruptcy as a last resort are common options for smaller debts.

A District Court charging order would require your debtor to account to you before selling or refinancing the charged land. You could also apply to the High Court to have the land sold after the charge is registered.

Having your debtor examined in the District Court usually results in an attachment order on income so the debt is paid by instalments over time. A warrant to arrest is normally issued if your debtor does not show up to be examined.

Bankruptcy is a last resort because there is often a risk of minimal recovery: The Official Assignee takes control of a person’s income and assets upon bankruptcy, with funds realised and distributed in an order of priority similar to liquidations. As an unsecured creditor (in this scenario) you therefore shouldn’t hope to recover the face value of your debt upon bankruptcy. However, the threat of bankruptcy is often powerful enough to drive debtors to negotiate a payment plan when they wouldn’t otherwise. A debtor cannot control a business when bankrupt, nor travel overseas without consent or be employed by a relative, and restrictions apply when obtaining credit.

You therefore have a range of options available to recover your debt, each with its own benefits and risks. Profiling the debt should help identify which option might be best, as well as an escalation strategy from one to the next.

Turner Hopkins has a specialist team of experienced debt recovery professionals providing advice and assistance on this complex and concerning aspect of business. Please phone Michael Robinson to discuss your options.