What is insolvency and what are the options?

Business Man sitting on outdoor steps looking like he is struggling

In the 12 months ending Q2 2019, 1 in 382 adults became insolvent. In just Q2 of 2019 alone, 30,937 people entered into either bankruptcy (4,228), a debt relief order (6,752) or an individual voluntary arrangement (19,956). So, what do the different options for insolvency mean and what can you do if you are finding yourself with financial difficulties.

 

Individual Voluntary Arrangement (IVA)

An Individual Voluntary Arrangement is a legally binding agreement between you and your creditors to pay back your debts over a set period.

You will need the IVA to be set up by an insolvency practitioner, and they will charge a fee to do so. You can expect to pay in the region of £5,000 according to Citizens Advice. The insolvency practitioner you choose to deal with will handle the creditors throughout the IVA.

As part of setting up an IVA, a repayment plan will be created, based on what you can afford, and put forward to your creditors. Once the agreement is accepted by 75% of your creditors, it becomes binding on all your creditors.

You will then pay back the agreed set amount each month to the insolvency practitioner, and they will redistribute the funds to your creditors.

If the payments in your IVA are not enough to repay all of your debt, then potentially the rest of the debt could be written off. However, you would need to discuss this with your insolvency practitioner as it is based on your individual circumstances.

You can find out more about Individual Voluntary Arrangements on the Citizens Advice website here.

IVAs are the most common type of individual insolvency, accounting for 64.5% of cases. Since their introduction in 1987, the three highest levels of IVAs have been recorded in the last three quarters.

 

Bankruptcy

Bankruptcy is a form of debt relief available for anyone unable to pay their debts. Bankruptcies occur either because you can’t pay your debts and therefore you apply online to make yourself bankrupt. Or, a creditor who is owed £5,000 or more can apply to the court to make a person bankrupt.

Bankruptcy will usually last for 1 year, and your assets may be used to repay the debt you owe during this time. Most debts not paid during this time will be written off. However, some debts can never be written off, such as student loans and court fines.

You could also have a bankruptcy restriction order placed against you. This will put restrictions on your finances and can last up to 15 years.

You can apply for bankruptcy online via the gov.uk website, and it costs £680. However, there are serious implications when choosing bankruptcy, so ensure you have explored all your options before making any decisions. You can find further information on bankruptcy on the Citizens Advice website here.

 

Debt Relief Order (DRO)

A Debt Relief Order is available to people who have a low income, low assets and less than £20,000 of debt. However, some types of debt don’t count towards this limit, so ensure you have checked to see if you are eligible.

In simple terms, a DRO freezes your debt for a year and potentially then writes it off if your circumstances have not changed. However, it is worth noting that you’re still responsible for paying off any debts that aren’t included in the DRO.

You are required to use an approved intermediary called a Debt Relief Order Advisor, and the cost of applying for a Debt Relief Order is £90. If you are unable to meet this cost, then you may be able to get assistance from a charity to help with the fees.

You can find a Debt Relief Order Advisor at most local Citizens Advice Bureaus.

If you need help paying for the expense of a Debt Relief Order, then you can use the grants search tool on the Turn2us website to find out about support in your local area.

Further information about Debt Relief Orders can be found on the Citizens Advice website here.

 

Things to consider

Before deciding to enter into any form of insolvency, ensure that you are aware of the impact it could have on your future financial situation.

For example, it may make it difficult to get credit in the future, or you may have problems applying for a mortgage. If you become bankrupt and your income is high enough, you could be asked to make payments towards your debts for 3 years. You may find you are restricted from entering into certain professions and going bankrupt could affect your immigration status.

It is essential to look at all options available to you and both the short and long-term effects.

 

If you need help

If you are struggling with repaying your debts or are concerned about the impact your debts are having on your lifestyle or mental health, then support is available.

The Money and Mental Health Policy Institute have information on organisations that can provide free support.

You can also download free budgeting templates here to start managing your day to day finances better.

If you are still able to meet your financial commitments but are concerned about the future, or how you could be better utilising your available resources, then consider seeking independent financial advice.

A Life Centred Financial Planner can sit down with you and look at the life you are trying to achieve and how your finances can support those aims. They can help you create a financial plan so that you are using your money in the most effective way. Working with a Life Centred Financial Planner can give you peace of mind about the future and confidence in your financial decisions going forward.

We offer a complimentary 30 minute consultation, with no obligation to sign up to anything. We are passionate about helping you to create a brighter future. Contact us today to see how we can help.

 

Further information

If you found this information useful, you may also want to check out the following:

 

MRA help individuals, businesses and families achieve the best quality of life they can with the resources they have. MRA specialise in corporate solutions, cash-flow analysis, taxation, debt management, savings and investments, lifestyle planning and much more.

Business Consultants based in East Sussex we service clients across the South East, Sussex and Kent, including smaller towns such as Ashford, Battle, Bexhill, Bodiam, Brighton & Hove, Cranbrook, Crowborough, Eastbourne, Hailsham, Hastings, Heathfield, Herstmonceux, Lewes, Mayfield, Newhaven, Rye, Seaford, Sevenoaks, Tenterden, Tonbridge and Tunbridge Wells.