KiwiSaver and Bankruptcy: A Recovery Option for Creditors Pre-Bankruptcy.

New Zealand's KiwiSaver scheme, introduced in 2007, has become a cornerstone of the country's retirement savings framework. However, when financial difficulties arise and bankruptcy looms, both debtors and creditors face complex questions about how KiwiSaver funds are treated in insolvency proceedings. This article explores the intersection of KiwiSaver and bankruptcy law, with particular focus on recovery options available to creditors before formal bankruptcy proceedings commence.

If an individual is adjudicated bankrupt in New Zealand, their assets vest in the Official Assignee (OA) for the benefit of creditors. One of the exceptions to this rule is the individual’s KiwiSaver. Despite being considered an asset under the Insolvency Act, the OA cannot access these funds while they remain in the KiwiSaver fund. If withdrawn during the term of your bankruptcy they could become available to creditors.

The reason behind the exception is that the KiwiSaver Act was put in place to promote long-term retirement savings and remove some of the burden from the government of supporting individuals in their retirement, it was not intended to serve as a pool of funds for creditors.

The Pre-Bankruptcy Recovery Option

This bankruptcy exception creates a window for creditors before bankruptcy. If a debtor is facing mounting pressure and is not yet bankrupt, creditors may encourage the individual to apply for an early withdrawal from their KiwiSaver. If successful and the withdrawal application is approved by the KiwiSaver provider, the withdrawn funds become accessible cash and can be used to repay debts. This would then provide the creditors with access to an asset that would not traditionally be available to them in bankruptcy.

This approach does play round the intention of the Act to a degree but remains a legal option. It does raise a risk for those creditors who act early. While they may recover funds, other creditors may receive nothing upon bankruptcy. In this case those creditors who receive funds run the risk that the funds received may be clawed back by the OA to be re-distributed in accordance with the Insolvency Act.

For those concerned that an individual may choose to sell up their assets and dump the funds into their KiwiSaver pre bankruptcy, effectively trying to protect their assets and exclude them from their bankruptcy, the OA does have a number of powers to investigate these transactions and look to recover them for the benefit of creditors if they have occurred within certain timeframes and at a point when the individual was already insolvent.

What This Means for Stakeholders

• For Creditors: Timing is everything. Acting before bankruptcy may yield a better recovery in full, or in part if the funds are clawed back. It may be beneficial to ensure all creditors are paid evenly so the funds are not clawed back, and a chunk gets used for the OA’s time and legal cost.
• For Debtors: Understanding their rights and the long-term consequences of early KiwiSaver withdrawal is crucial. They need to be aware that in a bankruptcy these funds would not be accessible. But if they can be used to avoid bankruptcy entirely and settle all outstanding creditors’ claims that may be acceptable as a good trade off to the individual. Ultimately, they need to be aware of their options to make an informed decision.

The increasing value of KiwiSaver balances across the New Zealand population means these issues will become more significant over time.

This article provides general information only and should not be considered legal or financial advice. Professional advice should be sought for specific situations involving KiwiSaver and potential bankruptcy proceedings.