Fog surrounds bankrupt Kiwisavers
Government officials are probing new ways for creditors to crack into bankrupts' KiwiSaver accounts.
A High Court test case is already underway to clarify what happens to KiwiSaver in bankruptcy, but the Ministry of Business, Innovation and Employment (MBIE) believes it is too narrow to tackle all of the issues.
The Official Assignee is seeking a declaratory judgement against a KiwiSaver trustee clearing up when it can get its hands on KiwiSaver, with the aim of using the money to repay a bankrupt's creditors.
The test case is set to be heard next month in the Wellington High Court.
But, regardless of the outcome, MBIE officials will conduct their own review and report to government ministers.
They will canvass issues including whether creditors should be able to access Crown, employee or employer contributions, or some combination of the three, and whether someone emerging from bankruptcy should be able to open a second KiwiSaver account while their first remains open and in the hands of the Official Assignee.
When a KiwiSaver goes bankrupt, the Official Assignee steps into their shoes and can apply to crack open their KiwiSaver account.
But at present the only way to release the money early is to apply under KiwiSaver's "hardship" provisions.
That has proved of little practical use to creditors because most trustees of KiwiSaver schemes refuse to release money until the bankrupt turns 65, potentially decades later.
Trustees argue that, just because someone is bankrupt, it does not mean they are allowed to access their money for hardship.
Hardship covers things like illness and the inability to make mortgage payments and trustees must be "reasonably satisfied" that the KiwiSaver member is suffering or is likely to suffer from significant financial hardship.
Arguably, releasing cash early to pay creditors would do nothing to relieve the bankrupt person's situation and may make it worse by reducing their net wealth.
MBIE officials have hinted at a possible law change, saying a full review was needed to look at a broader range of policy issues than the court case could canvass and to clear up the "terrible" uncertainty surrounding KiwiSaver in bankruptcy.
They said the court case remained important because it would determine what happened in any bankruptcies starting before any new law took effect.
The Official Assignee is seeking a declaratory judgment against Trustees Executors Ltd, the trustee for two bankrupts whose KiwiSaver accounts the Official Assignee believes it should be allowed to access.
MBIE says the issue is that the Kiwisaver Act does not specifically refer to the status of KiwiSaver accounts in bankruptcy and nor does the Insolvency Act.
The Official Assignee has persuaded trustees of many KiwiSaver schemes to release personal and employer contributions totalling at least $440,000 in 165 bankruptcies to date.
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