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.
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.