Finding yourself in severe financial difficulty is alarming. It can have a detrimental impact on your life, and if not addressed can lead to a range of complicated and ongoing legal issues.
That’s why it’s important to receive professional advice as early as possible, to explore options and devise the best strategy to deal with any difficulties you are experiencing.
What is personal insolvency?
Personal insolvency is when someone has debts and financial commitments that they are not capable of repaying.
In other words, their liabilities exceed their assets and their income.
It’s important to distinguish between temporary financial issues, which may be straightforward to resolve, and a long-term disparity that cannot be easily addressed by budgetary adjustments. Bankruptcy is the most well-known, but there are other less dramatic potential outcomes.
Personal insolvency relates to your financial situation, not that of a business.
If, however, you run a company as a sole trader, then your business and personal assets are essentially the same.
You will be held personally accountable for any liabilities accrued by your business.
In the case of a partnership, you are jointly responsible for any debt.
Even if your that debt accrues as a result of a partner’s financial difficulties, you are also responsible for any that pertains to the business.
Types of insolvency
There are essentially two different types of insolvency:
- Cash flow insolvency
An individual can become cash-flow insolvent when their assets are greater than their liabilities, but the liquid capital they have available to them is insufficient to clear urgent debt. They might own property worth more than their debt, for example, but don’t have the cash at hand to service that debt. This situation can usually be resolved through negotiation, with a creditor persuaded to wait for assets to be sold rather than take further action.
- Balance sheet insolvency
If the outstanding debts are greater than the total value of the assets owned, this is called balance sheet insolvency. This type of insolvency is serious, but an individual may still have sufficient cash flow to keep servicing their debts. However, they will only legally be able to pay a bill if it’s to the benefit of all outstanding creditors. If someone cannot do this, then they may face bankruptcy.
What are the signs that I might be insolvent?
Sometimes financial problems are not always easy to spot, even for the person who is experiencing them.
Personal insolvency can often be pernicious, creeping up on someone over time.
It is not always the result of extravagance and serious overspending, but can develop over time because of a consistent, if not dramatic, disparity between income and liabilities.
If you are unable to meet your financial obligations on an ongoing basis, then this might suggest you are insolvent or nearing insolvency.
People approaching personal insolvency often increase their borrowing in an attempt to meet their existing debt.
This risks creating a spiral of extended borrowing that can become increasingly hard to escape.
Business failure, relationship break-up, ill health and other life challenges can create severe financial pressures.
If these aren’t handled carefully, they can soon create a situation which can be difficult to avoid.
If you suspect you are heading towards insolvency, it’s important to take a careful look at your current finances.
Be honest with yourself, and seek impartial advice.
Personal insolvency doesn’t always have to lead to bankruptcy, and the sooner you tackle any issues, the greater the chance of avoiding that particular outcome.
What are the options if you face personal insolvency?
There are a number of options available if you face personal insolvency.
The most appropriate depends on your personal circumstances, and the extent of your liabilities.
- Informal arrangement
This is most appropriate where an individual has a small number of personal creditors which they want to pay back in manageable instalments over an extended, but realistic, period. These agreements are reached individually with each creditor, and are not legally binding. This means that a creditor can demand payment in full at any time.
- Debt Management Plan
This is a way for a debtor to reach an informal agreement with creditors about how they will pay what they owe. This is usually in small amounts over a realistic period. It differs from an informal agreement in that it will usually be managed by an authorised debt management company, who will agree a plan with both the debtor and any creditors.
A single payment is usually made to the debt management company, which distributes the money to creditors according to the terms of the agreement. This provides the creditors with reassurance they will receive what they are owed.
- Individual Voluntary Agreement
An Individual Voluntary Agreement, or IVA, is usually entered into as an alternative to bankruptcy. An IVA is usually administered by a licensed insolvency practitioner. It differs from bankruptcy in that debtors can put forward a deal that is most appropriate to their particular circumstances, and are free to choose their licensed insolvency practitioner.
It can be a more appropriate course of action if an individual is asset rich, but cash poor. For example, a property could be remortgaged to help meet the payments on an IVA, while in a bankruptcy you may have to sell property to pay back your creditors.
- Debt relief order
Debt Relief Orders (DRO) were introduced in 2009 for individuals owing less than £20,000 and who had no significant assets, as an alternative to bankruptcy. They share some similarities though, and to obtain one debtors have to liaise with a Government-appointed Official Receiver as well as an authorised debt adviser.
Bankruptcy is often misunderstood as being when someone is unable to pay their debts.
In fact, it refers to the outcome of an official court process. A person is only bankrupt when a court makes a bankruptcy order against them. Documents are served on them in advance, so it’s unlikely that anyone could become bankrupt without being aware that action has been taken against them. Once you’ve been declared bankrupt, you must report to an Official Receiver to discuss your personal financial history. You are then made subject to several legal restrictions.
Being made bankrupt can have serious implications on what someone can, and cannot, do when it comes to managing your finances. For example, it automatically prevents you from acting as a company director until your bankruptcy is discharged.
Can a person declare themselves insolvent?
As we have explored above, there is a difference between insolvency and bankruptcy.
While one means you do not have the means to service your debts and need to find a solution, bankruptcy refers to a court judgement.
While declaring yourself insolvent may be the beginning of finding a solution to your situation, a bankruptcy order would be a radical step with serious consequences.
It is usually a last resort, necessary as the only way in which to satisfy creditors.
Declaring yourself bankrupt
Declaring yourself bankrupt is perfectly possible, and is a legal procedure usually followed when all other options have been exhausted.
In some cases, it may be a proactive option.
Becoming bankrupt has serious legal implications, and should never be agreed to without first receiving professional advice.
To declare yourself bankrupt, you need to create an account online and complete an application.
As part of the process, you’ll need to provide information regarding your income, debts, and outgoings.
You will also need to include any letters you have received relating to your debts, such as correspondence from bailiffs or enforcement agencies.
Your application will be reviewed by an official adjudicator from the Insolvency Service, who will make the final decision about whether you should be declared bankrupt.
The outcome will usually be known within 28 days of an application being made.
What are the benefits of declaring yourself bankrupt?
Once you have been declared bankrupt, your creditors can no longer pursue you directly for the repayment of debts and they will be expected to deal solely with your trustee.
In most cases, this will be the official receiver or an insolvency practitioner.
Once bankruptcy has been approved, most of your debts are written off immediately and creditors will be unable to make any attempt to recoup money owed.
For many people, this clean break is one of the most compelling reasons for applying to be made subject to a bankruptcy order.
What are the disadvantages of declaring yourself bankrupt?
Once you have been declared bankrupt, you will be subject to a range of legal restrictions.
This will inhibit your ability to accrue further debt, how you can run a business, and how you manage your finances.
You will also be at risk of losing valuable assets that belong to you.
Bankruptcy will remain on your credit report for six years from its date of approval, and will impact your credit score.
You will also face restrictions on positions you can hold within the community, such as a charity trustee or school governor.
Loss of assets during the bankruptcy process
Assets you own will be sold, and the money raised will be used to go towards paying off your debts.
These assets can include your home, car, and any valuables that are not regarded as essential for everyday living.
Who can file a personal insolvency petition against me?
If you find yourself personally insolvent then one, or more, of your creditors can apply to have you declared bankrupt as a means of recouping their money.
Sometimes creditors can threaten bankruptcy when it’s not the most appropriate means of action for them to take, particularly if your outstanding debt to them is less than the lower limit for a bankruptcy application to be made.
This currently stands at £5,000.
If that is the case, it can be considered harassment and you may be able to take legal action against them.
What steps would a creditor take?
A creditor needs to show that they have attempted one of two legal methods by which to recoup any money owed.
- Issuing you with a statutory demand
This is a legal notice about any money you owe. You will have 21 days in which to pay your debt, or to reach an agreement to pay. If you don’t believe the demand is correct, you can requested for it to be cancelled. If none of that happens, then your creditors can ask the court to make a bankruptcy order.
- Attempting to enforce a court judgement
If a court judgement has been made against you instructing you to repay debts, your creditors have the right to try to enforce this order. If serious attempts to enter your home and take your property have been made by bailiffs, but they have been unsuccessful, then they can begin bankruptcy proceedings against you.
Get professional advice
If you fear that you are moving towards personal insolvency, and are concerned about the consequences, you should seek professional advice as soon as possible.
The experienced team at Richardson Lissack can provide confidential and impartial advice to help you find the most appropriate way forward.
Our lawyers are available 24/7 to assist you and provide legal advice. Contact London 020 3753 5352 or Manchester 0161 834 7284. Alternatively you can email email@example.com