Summary: This article explains the implications of being insolvent and possible solutions that could avoid the need for bankruptcy.
Insolvency is when an individual or a business has debt that outweighs the total value of any assets. In the case of an individual, an indicator of insolvency could be if their monthly income is no longer sufficient to cover the monthly repayments on debt and essential living expenses. When an individual falls into arrears with debt repayments or mortgage, it is possible that the creditor(s) could petition for bankruptcy. However, this is not always the only outcome. It is vital to seek advice, ideally before it gets to this stage, and a reputable, licensed money advisor may be able to suggest an alternative.
Individual Voluntary Arrangement (IVA)
An IVA is aimed at those who have unsecured debt in the region of £10,000 - £15,000 (cases vary on an individual basis) and who are insolvent (i.e. their income is no longer sufficient to cover essential expenditure and debt repayments). In order for an IVA to be implemented, creditors of at least 75% of the value of the total debt must agree to the IVA proposal. If agreed, the individual would be required to repay an affordable monthly amount for a set period of time (usually 5 years), after which time, any outstanding debts will usually be cleared. Not all debt can be included (mortgages and student loans for example) and so it is important to seek advice.
Debt Relief Order (DRO)
DROs are aimed at those on a low income (less than £50 a month left after essential expenditure such as rent and bills), with up to £15,000 of unsecured debt. Once the order is in place, no further payments to creditors are made by the debtor and it lasts for 12 months. If at the end of this period, the individuals financial circumstances have not changed, then the debt is cleared. There are a number of restrictions imposed on an individual undergoing a DRO, so as always, advice should be sought.
Debt Management Plan (DMP)
Unlike an IVA or DRO, an individual considering a DMP does not have to be insolvent, nor is it a legally binding agreement. In a similar way to an IVA, an informal agreement is reached with all the creditors to pay a lower monthly amount. Often a third party will negotiate on behalf of the individual, and so an affordable fixed monthly amount will be paid, and split between all the creditors. Unlike an IVA, where the debt will be cleared after usually 5 years, with a DMP, the creditors still expect to regain all of the outstanding debt, so the repayment plan could increase the overall time it takes to clear the debt.
As will always be recommended, anyone who feels they are in, or approaching financial difficulties, it is vital to seek advice immediately.