When most people think of an individual becoming insolvent they think of bankruptcy, but according to the latest quarterly statistics for Q3 2023, only 8% of insolvent individuals were made bankrupt. Out of a total of 24,418 insolvencies 2,015 were bankrupted.
|Total individual insolvencies
|Debt relief orders
|Individual voluntary arrangements
England and Wales, Q3 2022 to Q3 2023, seasonally adjusted
For a creditor to make someone who owes them money bankrupt they must prove that they are owed at least £5,000 and have to pay a £1,500 petition deposit and £302 in court costs. This can be time-consuming and expensive if the debtor has insufficient assets to cover costs. So, what are the alternatives to bankruptcy?
The biggest percentage of personal insolvencies are Individual Voluntary Arrangements (IVA). You can only enter into an IVA if your liabilities exceed your assets, or if you cannot pay your liabilities as and when they fall due. This is a formal and legally binding agreement between an individual and their creditors to make payments over a period of time (usually five years) in full and is a final settlement of their debts.
The reason for their popularity is that, generally, the cost of an IVA administration is less than a bankruptcy. This allows a deal to be made that gives a better return to creditors than they would receive in a bankruptcy, but the cost to the debtor will be less. There are often robust negotiations to find a fair compromise between the parties, but ultimately it is the creditors who accept or reject the proposal.
There are safeguards to ensure the terms of the IVA are adhered to. During the period of an IVA, unsecured creditors deal with the IVA Supervisor, a licensed Insolvency Practitioner, and not the debtor.
The insolvent individual commits to make the agreed payments, usually a single monthly payment or a lump sum, and let their Supervisor know if their income increases or they receive a windfall. Also, they cannot take out any new credit without permission and no further interest can be added to the debt.
A Debt Relief Order (DRO) is an alternative formal debt solution designed for people with little or no assets and low income.
For an individual who doesn’t own their own home, has assets worth less than £2,000, has little or no spare income, and liabilities that are less than £30,000, a DRO could be a way to deal with your debts.
You do not need a licensed Insolvency Practitioner to administer this type of arrangement. To keep costs to a minimum an approved debt adviser, usually from a charity, will assist in advising and completing the paperwork. A DRO costs £90 and after 12 months the debtor’s qualifying debts are effectively written off.
It is worth noting that a DRO is based on a person’s circumstances at the time that they make their application. They must inform the Insolvency Service if they have an increase in regular income, or if they receive any additional assets. This may affect the individual’s eligibility to have the DRO. However, as with bankruptcy or an IVA, creditors will not chase the debtor. They will register their claim with the Insolvency Service, and no further interest charges may be added.
A Debt Management Plan (DMP) is an informal agreement between an individual and their unsecured creditors. They are set up with a debt management company authorised by the Financial Conduct Authority. The debtor makes just one payment to the DMP provider which they then divide between all the unsecured creditors.
It may be an option for an individual who can afford their living costs and has a way to deal with any priority debts such as mortgage or rent arrears but is struggling to keep up with their credit cards and loans. The debtor would prefer someone to deal with their creditors for them. Also making one set monthly payment may help them to budget their day-to-day expenses more effectively.
It must be remembered that a DMP is not legally binding. This can be a double-edged sword. An individual is not tied in for a minimum period and can cancel it at any time if their financial situation improves. However, creditors might refuse to cooperate and continue to contact the debtor and won’t necessarily freeze the interest and charges, so the amount an individual owes might not decrease as quickly as thought. This problem can be exacerbated by any monthly administration fees charged.
As the name suggests an individual can get temporary protection from their creditors while they get debt advice and make a plan. The temporary protection can last up to 60 days.
The way to access this scheme is to find a free debt adviser on the MoneyHelper website.
If an individual enters into such a scheme it has the advantage that creditors cannot take enforcement action against them, contact them directly or add interest during the breathing space period.
Although the rate of inflation is slowly reducing, many individuals are feeling the pinch due to higher interest rates, as well as high fuel and food costs. It is good to know that there are alternatives to bankruptcy.