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Who pays the cost of bankrupting someone?

12 October 2021 | Sally Cunneen
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The threat of bankruptcy is often enough to encourage someone to repay their debts or negotiate a settlement. Hopefully the creditor (the person who is owed money) at least receives partial payment of the money they are owed.

However, in some instances the debtor (the person who owes money to the creditor) finds themselves in over their head. They simply can’t repay all of their creditors or negotiate their way out of bankruptcy. In these circumstances, who pays the cost of bankrupting someone?

Who pays for bankruptcy?

Initially the Creditor pays the cost. Those costs are later claimed from the Debtor, usually through a repayment order from the court.

Regaining the costs of filing bankruptcy costs very much dependent on what assets the Debtor holds, whether personally or trying to hide them in a Trust. Once adjudicated bankrupt, an Official Assignee will be assigned to investigate what funds or assets the Debtor has available to repay their debts. 

After bankruptcy who gets paid first?

Solicitors’ costs are classified as a ‘preferential claim’ against the estate and will be among the first to be repaid if, and when funds become available from the estate. 

Depending on how much the debtor has in assets and how many creditors are lining up to be paid will determine how long you have to wait for your money back. You could potentially receive most of your solicitor’s costs back. 

As for the repayment of the actual debt, your claim usually forms part of the unsecured creditors claim, which will only be repaid after the secured or preferential claims have been paid. Again, this only happens if there are funds available. 

Is there another way?

While it may take a lot longer to get your money back, working out a payment plan with your debtor can be an option for making sure you are repaid. In the “Building business resilience” episode of the Real Solutions Business Podcast, Director of Heat Pumps NOW Blair Ashdowne talks of a time where he was facing bankruptcy. By approaching all of his creditors, including the IRD, explaining the situation and presenting them with a payment plan, Blair was able to continue trading and working off his debt. Today, his books are up to date, his creditors are paid, and he’s no longer in a situation where bankruptcy is looking likely.

Terms of trade

What are your business terms of trade? Did you present a copy of your terms with your proposal or before you started doing business with them? Working with your lawyer or credit controller, we can tailor terms of trade for your business which means the costs of debt recovery are paid for by your debtor, rather than you.

If you’re starting out on a big project, like a property development, we can also help to secure your claim up front, so you become a preferential creditor and are more likely to be paid if the business deal goes south.

Both of these options must be in place right at the beginning. You can’t add them retroactively after your debtor has stopped paying and you’re looking at starting bankruptcy proceedings against them.

Helping you get paid.

Is it worth pursuing bankruptcy? Have a chat with your advisor at Godfreys Law. We can walk you through what the process involves and answer all of your questions. 

You may choose to pursue bankrupting a Debtor, knowing it will be highly unlikely you will be reimbursed for solicitor costs or repaid the outstanding debt. You might choose this option for the peace of mind that the Debtor cannot continue running a business and incurring further debt knowing they are not in the position to repay it. 

If you feel like you’re out of options for getting your money back, come and have a chat with the debt recovery team at Godfreys Law.

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Article by:

Sally Cunneen

Solicitor

Sally originally joined our team as a law clerk while studying and she quickly made herself invaluable to the team at Godfreys. Since gaining her Practising Certificate in November 2020, Sally has been a key member of our Commercial and Employment Law teams.

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