A Guide to Personal Insolvency

A Guide to Personal Insolvency

In this guide, we’ll explore what personal or individual  insolvency means and what options may be available to you.

Personal or individual insolvency looks at a number of ways to help anyone facing financial difficulty with their business. What's right for you depends on how much debt you're in, your circumstances, and the types of debts involved.

In this guide, we’ll explore what personal or individual insolvency means, and what your options may be.

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What is personal insolvency?

The state of your business reaching personal or individual insolvency means you can't keep up with your credit repayments when they're due.

This isn't just a case of occasionally paying an invoice late, or having some cash flow difficulties because your own invoices haven't been paid yet. It means your finances have reached such a state that they need restructuring or managing in a different way.

This often happens using a personal or individual insolvency service.

What are your personal  insolvency options?

Each personal insolvency option in the UK is restricted depending on the level of debt, the circumstances of the individual, and the nature of the debts involved. Below, we outline what your options could be.

Option 1: Non Statutory Solutions

These may include:

Informal Agreement – non-legally binding agreement reached between the debtor and creditor.
Debt Management Plan – agreement between a debtor and creditor addressing the terms of an outstanding debt.
Consolidation Loan – combining all existing debts into one loan.

Where possible, it's usually better to address your creditors and how to repay them in good faith, to avoid more formal, harsher measures. Some non-statutory options include:

1. Informal Agreement, which is a non-legally binding agreement reached between the debtor and creditor.
2. Debt Management Plan, which is an agreement between a debtor and creditor addressing the terms of an outstanding debt.
3. Consolidation Loan, which is where you combine all existing debts into one loan, where you pay  a manageable, fixed amount back each month.

Option 2: Administration Orders

If a creditor obtains judgment the court may pass an Administration Order whereby a debtor will make monthly payments to the court for distribution between the creditors.

Total debts must be less than £5,000. Creditors listed on the Administration Order cannot take any further action against the debtor without the court’s permission.

If your debts are less than £5,000, then an Administration Order could be granted. This means you'll need to pay a fixed monthly sum to the courts, who will then distribute this money between your creditors. Your creditor won't be able to take further action against you without the court's permission.

Option 3: Debt Relief Orders (“DRO”)

These schemes are administered by the Insolvency Service and are suitable for those debtors who have a maximum disposable monthly income of £50, have less than £20,000 worth of unsecured creditors and have less than £1,000 worth of assets.

The DRO freezes your debt repayments and interest for 12 months, after which the debt will be written off in the event that the debtor’s financial circumstances have remained the same.

A debt relief order must be administered by a professional insolvency service, and can provide some much-needed breathing space from your debts. A DRO freezes your debt repayments for 12 months, after which the debt will be written off if your financial circumstances have got worse or remained the same.

To qualify, you must have a maximum disposable monthly income of £50, have less than £20,000 worth of unsecured creditors, and have less than £1,000 worth of assets.

Option 4: Individual Voluntary Arrangement (“IVA”)

An IVA is a statutory solution for debtors to reach agreement with their creditors for repayment of the debt.  They are designed to make repayments more manageable and affordable and are a formal alternative for individuals wishing to avoid bankruptcy. By and large repayment will be in part rather than full.

An IVA must be set up by a Licensed Insolvency Practitioner who would act as Supervisor of the Arrangement. Prior to the implementation of an IVA, a meeting of creditors will need to vote for the approval of an IVA.  If less than 75 % of voting creditors approve the IVA the outcome for the debtor is commonly bankruptcy.

An IVA will largely let the debtor avoid the stigma and restrictions of bankruptcy. It can also provide the debtor with more control over their assets than bankruptcy but will generally only be a viable option if:

The debtor has a disposable income; or
Has a saleable asset or third party willing to donate funds to the IVA.

An IVA tries to let the debtor avoid the stigma of bankruptcy, but also allows you to have more control over your assets. Typically, to be eligible for an IVA, you need to have disposable income, as well as a saleable asset or third party willing to donate to it.

IVAs are designed to make repayments more manageable and affordable, and will usually be in part rather than full. It needs to be administered by a licensed insolvency practitioner and, for it to be granted, 75% of voting creditors must agree to it.

Option 5: Bankruptcy

This is invariably a creditor driven process, which follows a bankruptcy order made by the court. It is a creditor's action of last resort in attempting to collect an outstanding debt. The process aims to ensure that all assets are distributed fairly amongst creditors.

From the debtor’s point of view, the bankruptcy order can remove the pressure of creditors and so enable him or her to make a fresh start.

A Licensed Insolvency Practitioner would act as Trustee in Bankruptcy and has wide ranging powers and authority in order to review the conduct of the debtor. This in turn may result in recovery of funds for the benefit of creditors.

Bankruptcy is usually driven by creditors and is often a last resort to collect outstanding debt. While bankruptcy must be ordered by the court, a licensed insolvency practitioner will act as a trustee. They then have a variety of powers to review the debtor's financial state and assets, and what can be done to pay back creditors.

If you’re struggling to keep up with your repayments, it’s essential to get professional advice to see what your options are. The personal insolvency practitioners at Oury Clark are here to help make sure you pick the right option for you. 

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