Bankruptcies up 20pc and rising

The number of people filing for bankruptcy has jumped by 20 per cent this year and is likely to rise by at least that amount next year, according to credit information company Veda Advantage.

In total, 4751 individuals have filed for bankruptcy or no-asset procedures this year, compared with 3949 in 2007. Veda Advantage country director John Roberts expects the figures to rise in 2009.

According to the company, credit applications for November, traditionally a busy time for lenders in the lead-up to Christmas, are down 26 per cent on 2007 and are at their lowest level in six years.

Massey University banking lecturer David Tripe said the increase in bankruptcies was caused by a bad economic environment and more lenient bankruptcy laws. The no-asset procedure, introduced in December 2007, has fewer restrictions than bankruptcy although there is still a considerable impact on a consumer's credit worthiness.

"Banks will find it less attractive to lend on an unsecured basis in marginal cases," he said. "The situation will get worse for lower-income people."

Under New Zealand's credit reporting rules, bankrupts find it very difficult to get credit when they come out of bankruptcy, Mr Roberts said. Adverse information like a bankruptcy remains on a consumer's credit file for seven years while a no-asset procedure stays there for five years.

At the moment companies like Veda are only allowed to hold negative credit information on consumers.

"In most other countries you have comprehensive credit reporting: both negative and positive information can be held," Mr Roberts said.

"In other countries, if they come out and demonstrate they've rehabilitated, their chances of getting a loan are similar to anyone else."

The current rules made it hard to determine who should and shouldn't be lent money. Veda advocated a comprehensive reporting regime like that being introduced in Australia so both negative and positive information can be held. The Government and Opposition were watching to see how the Australian situation played out, Mr Roberts said.

The rise in bankruptcies was unlikely to have much impact on banks' profits because the amount of non-mortgage lending to households was low, Mr Tripe said.

But he said authorities should be wary of making it easier to be declared bankrupt or get a no-asset procedure, because this would make it harder for people to get loans.

- © Fairfax NZ News