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Personal Insolvency

An Introduction to Personal Insolvency

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Being in personal financial trouble can be hugely stressful. That’s why it’s important to get advice from the right experts when you begin to experience financial difficulties.  By seeking advice early, a personal insolvency expert can help to explore what options are available to you. There are often more options available which, whether you are a debtor or a creditor, could ultimately leave you in a better position than you first thought.

Whatever your personal financial difficulties may be, you can be assured that the Moore South Restructuring and Insolvency team has the knowledge and expertise to help you achieve the best possible outcome. 

Our Restructuring and Insolvency team has many years of experience dealing with all forms of insolvency - both corporate and personal and can therefore offer confidential expert advice based on their knowledge of the latest updates to insolvency law and also the many real cases they have dealt with. 

Personal insolvency is simply defined as when you are unable to pay your debts as and when they fall due. The most well-known form of personal insolvency is bankruptcy, but this is usually not  the best option for those needing help, or indeed for creditors seeking payment. So what are the options available? Our brief guide below summarises each option. 

We have also developed a flow chart and questionnaire (links above) to help you determine the most appropriate solution tailored to your needs.
 

Personal Insolvency Options


There are five main personal insolvency options that can be worked through, depending on an individual’s circumstances:

Informal Arrangement is suitable where a debtor has a small number of creditors which the debtor wishes to pay off in full over a manageable period of time to suit their own personal circumstances. Such arrangements are subject to agreement with the individual creditor(s) and are not binding so creditors may enforce their debt at any time during the arrangement.

Debt Management Plan (DMP) is a way for a debtor to informally agree with their creditors how to pay their debts over a manageable period of time. They are usually put in place either when debts can only be paid off in small regular amounts, or when the debtor needs time before making payments. In most cases the debtor works with an authorised debt management company to set up the plan and the plan is administered through that company. Payments are made to the company and it shares the payments out among creditors. This system allows creditors to trust that they will receive the funds they are owed, even if it will take longer than first thought, and also takes the stress of the managing the debt away from the debtor. Similar to informal arrangements, DMP’s are not binding on creditors and therefore does not prevent enforcement from a creditor.

Individual Voluntary Arrangement (IVA) is a binding formal agreement entered into between a debtor and their creditors as an alternative to bankruptcy. IVA’s are administered by licensed insolvency practitioners such as ourselves. Unlike bankruptcy, the individual has more control as they can choose their practitioner and can put forward a deal that is most appropriate to their circumstances. IVA can be a much more cost effective alternative to bankruptcy and are particularly useful where debtors are asset rich, but cash poor. 

For example, if a debtor has an asset, such as a home with equity that can be re-mortgaged, then this money can be used over a fixed period of time to pay off the debts according to the agreement.  It’s important to note however, that each individual case is different and each IVA needs to be drafted as such to meet the needs of both the debtor and their creditors who may require varying terms.

Debt Relief Order (DRO). This was introduced in 2009 as a way for individuals owing less than £20,000, having no significant assets (such as being a home-owner) and little surplus income to deal with their debts, by writing-off their debts without the need to enter bankruptcy. They are similar to the bankruptcy option and indeed are known in the industry as ‘bankruptcy lite’. Debtors have to deal with both the Government’s Official Receivers agency and an authorised debt adviser to obtain one.

Bankruptcy – This is the most recognised form of personal insolvency, but it is a myth that you are ‘bankrupt’ just because you can’t pay your debts. Bankruptcy is an official Court process and a person is only officially bankrupt if the Court makes a Bankruptcy Order against them. This involves documents telling them about the Court hearing being personally served on them in advance, so it is unlikely that a person could be bankrupt without knowing that Court action has happened. 

Once you have been declared bankrupt, either by a creditor or by yourself, you must then attend the Official Receiver to discuss your personal financial history. You also become automatically subject to a number of legal restrictions. Being made bankrupt is not for everyone and can have serious implications on what an individual can and can’t do financially . It also automatically prevents you from acting as a qualified professional; or as a company director and managing a business until you are discharged (often 12 months from being made bankrupt). 

We have frequently seen the mental stress that dealing with debt problems can bring. Facing the problems and talking in complete confidence to one of our highly experienced and professional team can help. We can help you work out which is the best option for your circumstances and help you move on.


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We provide our personal insolvency service from our five office locations:
If you require more information about the recovery options for personal insolvency, or if you wish to discuss anything we’ve mentioned in the above article, please contact our expert team now.