Case leaves bankruptcy questions unanswered

There are calls for a law change to provide clarity on what happens to a KiwiSaver account when someone is declared bankrupt.

Monday, April 14th 2014, 6:00AM

by Susan Edmunds

The High Court recently ruled that bankrupts’ existing savings in a KiwiSaver scheme are available to be distributed by the Official Assignee to creditors, but only after the KiwiSaver member qualifies to withdraw the money – usually at age 65.

And in doing so, it created almost as many questions as it answered.

The case went to court after the Official Assignee requested the trustee of a KiwiSaver scheme release the funds of two bankrupts under the significant hardship provisions.

One of the men had debts of $26,254 and a KiwiSaver balance of $11,860.46. The other had debts of $9,583 and a balance of $10,805.98.

The Official Assignee argued that bankruptcy was inevitably the result of significant financial hardship and so would be a qualifying event for early withdrawal.

But the Court said the applications had to be decided on an individual basis. It said the first man had become significantly better off upon bankruptcy because he no longer had to pay his debts. Even if he used his KiwiSaver account to pay off some of the debts, he would still be bankrupt so his situation would not be improved.

But the other would be able to clear his debts and could have his bankruptcy annulled. The Court suggested that might be enough to satisfy the financial hardship criteria.

Emma Dale, of Chapman Tripp, said: “The case doesn’t take this any further. The court has left it up in the air for trustees to decide whether it will alleviate hardship.”

She said the case did not address what happened to the returns, fees and losses of the ringfenced KiwiSaver account between the time the person was declared bankrupt and when the money could be accessed, and created a situation where there were two separate sub-accounts within a scheme, one holding money for the Official Assignee and the other holding the investment the person made after they were released from bankruptcy.

There were arguments for and against making KiwiSaver money available to creditors, she said. On one hand, it was specifically retirement savings but on the other, people might use their KiwiSaver accounts to stop creditors getting money. "It calls out for legal clarification either way.”

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