Summary: This articles explains the impact insolvency can have homeowners and the potential options available.
Insolvency is the term used when an individual, or business, finds there total debt outweighs any assets and income. A key indicator of insolvency is where total monthly income is not sufficient to cover essential expenditure as well as debt repayments. It is possible an individual may have to sell their home, but it depends on what outcome insolvency has. Once insolvent, there are generally 3 routes:
If an individual is insolvent, their creditors may petition for bankruptcy if they believe they will get some of their money back. A trustee or official receiver is appointed and any assets owned by the individual must be signed over so they can be sold to raise funds to repay as much outstanding debt as possible. While a property is considered an asset, the common belief that a home must be sold is not always the case. Where the value of equity in the property is less than £1000, it is generally considered to be not worth the forced sale, irrespective of its total value. Furthermore, if children also reside in the property, any forced sale may be delayed for up to a year to allow time for re-housing. It is also possible to keep the property if the individual has family or friends prepared to 'buy back' the equity in the property.
Individual Voluntary Arrangement (IVA)
An IVA is a legally binding agreement between creditors and debtor, whereby an affordable monthly amount is repaid each month, allowing for essential expenditure. It is normally available to those with in the region of £10,000 or more of unsecured debt, and have a reasonable amount of money left each month after all essential expenditure. As property cannot be include in the arrangement, and as mortgage repayments are include in essential expenditure, the individual will not have to sell their home. However, it should be noted that if the individual fails to keep up with the regular payments, the IVA may fail, and the creditors could petition for bankruptcy, in which case, there is a possibility the home may have to be sold.
Debt Relief Order (DRO)
A DRO is aimed at those who are insolvent and have less than £50 each month after essential expenditure, and have less than in the region of £15,000 of unsecured debt. Combined assets and savings must also not be more than £300 (as a general rule). Therefore, it is highly unlikely that this option would be available to homeowners in the first place.
If anyone believes they are insolvent, or is struggling to repay debt, it is important to seek advice from a licensed money advisor as soon as possible. It may be that the individual is not yet insolvent, and a solution such as a Debt Management Plan (DMP) could be a suitable alternative.