Debt resolution options to suit your needs
The latest insolvency figures show a 3.7% reduction in the number of people going insolvent compared to the same period last year. Out of 33, 935 personal insolvencies 13,907 were bankruptcies, 12,960 were individual voluntary arrangements (IVAs) and 7,068 were debt relief orders. IVAs have increased 4.6% since this time last year and bankruptcies are down 24.2% year on year.
But what are these two procedures and are they right for you? Moneywise Debtwizard, Mike Thomas, answers the most common questions.
What debts can be included and will they be cleared?
Bankruptcy - At the time of going bankrupt all your unsecured debts, such as credit and store cards, personal bank loans, overdrafts and catalogue bills are cleared. Also cleared is any claim from the mortgage lender if after repossession of the home there is still a shortfall of the money owed.
Some people say the debts are not erased but the obligation to repay them has been removed. In any event you no longer have to pay them back. Secured debts such as your current mortgage on your home, court fines and debts arising from fraud or maintenance payments are not cleared
IVA - The same debts as above can also feature in an IVA and once completed satisfactorily any remaining debt will be legally written off so lenders can no longer demand payment.
Can I keep my house?
Bankruptcy - If you own your home then the Official Receiver (OR) who oversees a bankrupt’s financial matters, will look at their share of any equity, that is the difference between the value of the home and the mortgage outstanding.
If the equity is low or negative then it is possible for the bankrupt or a friend or family member to purchase the OR’s interest in the home for a nominal sum. Sometimes this can be as little as £1 plus a small admin fee so yes, in certain circumstances a bankrupt can still keep their home.
IVA - Again if the equity is low or the homeowner is unable to remortgage their share on year four of a five-year arrangement then they can often extend their payment into the IVA for six to twelve months to cover this. Most people usually keep their home in an IVA.
Do I have to make any payments and if so how long for?
Bankruptcy – Usually you have to make payments for 36 months if it is deemed that you have at least £100 or more Disposable Income (DI). The DI is worked out after going through your normal and reasonable expenditure. Even then usually only around 60% – 70% of this will be taken.
IVA - The payments are normally for 60 months, two years longer than bankruptcy, and the individual will pay 100% of their DI, which is reviewed annually to see if contributions can be increased. Lenders also require 50% of any net overtime or income above what is stated in the IVA proposal, not a reduced sum as in the bankruptcy.
Do I keep my car/motorbike?
Bankruptcy - If the vehicle is paid for and nearer the value of £2,000 or above then it is possible that this may be taken and sold. However if it is needed to get to and from work, which generates an income then it’s possible you can keep your vehicle. Mobility vehicles are excluded.
IVA - If the vehicle is paid for and is of high value, e.g. £6,000 upwards then you may be required to sell the vehicle and purchase a cheaper one for say £3,000 and put the remaining sale proceeds into the IVA to boost the overall return to lenders.Remember, the IVA is for five years so a reasonable vehicle is required to see you through the arrangement.
What do I need to pay in fees?
Bankruptcy - The person going bankrupt has to pay a fee of £600, which is made up of a £450 Official Receiver's fee and £150 Court fee. If they can demonstrate that they are on benefits then they may be exempt or pay a reduced court fee.
IVA - Some IVA firms still charge up front fees but there are many that do not charge the consumer but take their fee from the contributions paid into the arrangement.
Will my name and address be advertised in the local paper?
Bankruptcy - Since the 6th April 2009 honest and cooperative consumer bankrupts have not needed to be advertised in the local paper. However those bankrupts seen as uncooperative or not to have revealed all their assets or liabilities may still be advertised in addition to any other cases that the Official Receiver feels warrants public interest.
IVA – These have never been advertised in the local paper. However, there is a public register that bankrupts go on until discharge, usually for one year, and in the case of IVAs, for the duration, usually, five years.
Do lenders have to agree to my bankruptcy or IVA?
Bankruptcy - No.
IVA - Yes, 75% of those lenders in value voting will be required to accept your proposal, once achieved then those that initially rejected it or who did not bother to vote will be legally bound by the arrangement.
An insolvency procedure is always going to be a big step so it is vital you seek professional advice as how best to manage any debt issues and the Moneywise support team has a list of agencies you could consider.
A homeowner’s worst nightmare; repossession is an action of last resort by mortgage lenders to recover money from borrowers that have failed to keep up with repayments on their mortgage or other loan secured on their home (see secured loan). Repossession is a legal procedure that has to go through several processes before the homeowner is evicted and the property reposed. These are: if a borrower keeps defaulting; the lender applies for a solicitor’s notice; the lender instigates possession proceedings through the court; at the court hearing a possession order is granted and sometimes a possession warrant; a bailiff is appointed and an eviction notice issued at which point the homeowner has two to three weeks to vacate the property.
Generally speaking, insolvency is to businesses what bankruptcy is to individuals. A company is insolvent if the value of its assets is less than the amount of its liabilities, or it is unable to pay its liabilities (loan payments) as they fall due. It’s an offence for an insolvent company to keep trading, so the main options available to an insolvent company are: voluntary liquidation, compulsory liquidation, administration or a company voluntary arrangement.
An alternative to bankruptcy, an Individual Voluntary Agreement is a legal agreement drawn up between the debtor, all creditors to whom money is owed (banks, credit cards etc) and a licensed insolvency practitioner who then administers the arrangement. Unlike a debt management plan (DMP), which is a more casual arrangement, an IVA is a legal process by which your unsecured creditors cannot then pursue you for payment of your debts outside the agreement. To qualify for an IVA, you must be a private individual (not a company), your debts must exceed £15,000 and you must have a regular income. If you are a homeowner with equity in the property, you may have to remortgage and use the equity to clear some of the debt before you enter into an IVA.
A person (or business) unable to pay the debts it owes creditors can either volunteer or be forced into bankruptcy – a legal proceeding where an insolvent person can be relieved of their financial obligations – but loses control over their bank accounts. Bankruptcy is not a soft option. Although it may wipe the financial slate clean, it is extremely harmful to a person’s credit rating (it will stay on your credit record for six years) and will adversely affect your future dealings with financial institutions. Bankruptcy costs £600 paid upfront.