There are a number of forms of personal insolvency. The most appropriate for an individual will depend on whether they are an individual, sole trader or a partner in a partnership and their ability to repay creditors. Personal insolvency is often an emotive subject as it can involve the family home and other assets that may have sentimental value. Individuals trading a business as a Sole Trader or Partnership are often unaware that if they enter a formal state of insolvency, their personal assets will be affected. It is always sensible to take early advice, as the sooner matters are dealt with, the more options will be available.
The types of personal insolvency procedures are as follows:
- Individual Voluntary Arrangement (IVA)
- Partnership Voluntary Arrangement (PVA)
- Debt Relief Order (DRO)
- Partnership Administration Order
- Debt Management Scheme (DMS) – not a formal insolvency process
For further advice and assistance regarding any aspect of personal insolvency, please contact Lameys and we will be happy to discuss, free of charge, any further implications and available options with you. Below is a brief outline of the various personal insolvency options:
An IVA is an alternative to Bankruptcy and is effectively a contract between a debtor and their creditors. The terms of the proposal to creditors may be very flexible, but creditors will reasonably expect their prospects of recovering money to be at least as good as in a Bankruptcy. An IVA can be based on an number of things, such as monthly contributions, the sale of an asset or a third party contribution and due to the lower costs, compared to Bankruptcy, is a better alternative for both the debtor and the creditors.
An IVA is often an attractive option for individuals owning their own property, as creditors will often allow for the property to be retained, so long as an acceptable alternative is offered, such as monthly contributions.
The Insolvency Practitioner (IP) you instruct is likely to help you with your proposal to creditors and will initially be known as your “Nominee”. If the creditors accept your proposal, an IP then becomes the “Supervisor” of the arrangement.
The IVA proposal will be voted on by the creditors at a creditors’ meeting. Generally, if over 75% by value of the creditors who are represented at the meeting (in person or by proxy) vote in favour, the IVA will be implemented. Creditors may put forward changes to the proposal, but they cannot impose them on you – you can decide whether or not to accept them.
Similarly if a business is trading as a partnership, it is possible to propose a PVA with the business creditors. The same rules as an IVA apply in respect of requiring creditors approval etc.
An IVA or PVA gives you an opportunity to avoid Bankruptcy and potentially retain assets or your business which may be lost if you were to be made Bankrupt. Lameys are able to assist in the preparation of a Voluntary Arrangement proposal and advise on what offer could be made to creditors.
Becoming bankrupt can provide a fresh start (subject to certain restrictions) and relieves you of the burden of your debts. It is a formal court procedure which can be commenced by yourself (debtors petition), a creditor who is owed more than £750 (creditors petition) or by a Supervisor of a failed Voluntary Arrangement.
The Official Receiver will deal with the administration of the Bankruptcy but this may be transferred to an IP who will act as your Trustee. The majority of your assets will be caught by the Bankruptcy estate and will vest in your Trustee. However, there are certain assets which will be excluded, which include; reasonable household furniture, tools of the trade and pension policies. Dependant on your current income you may also be subject to an Income Payments Order making contributions from your income for a period of three years.
Bankruptcy usually lasts for twelve months, although this time may be extended in exceptional circumstances where you are subject to a Bankruptcy Restrictions Order. Once you have exceeded the twelve months (subject to a BRO) you will receive your automatic discharge, and will be freed from bankruptcy.
Entering into Bankruptcy should only be taken as a last resort and it is recommended that you contact an IP at the first sign of financial difficulty as other alternatives may be available to you which can save assets or businesses.
DRO’s were introduced on in April 2009 and can be described as a ‘baby’ Bankruptcy. The procedure was introduced for individuals with low level debts which they could not afford to repay, and where Bankruptcy was deemed to much of an extreme measure. This procedure will not however be available to many individuals as certain restrictions apply. To qualify for a DRO the following criteria need to be satisfied:
- Unsecured liabilities of no more than £15,000;
- Total gross assets must not exceed £300
- Disposable income of no more than £50 per month, after household bills etc
- UK resident
- No DRO application within the last 6 years.
- The debtor must not be involved in another formal insolvency procedure at the time of application for a DRO.
Debt relief orders can only be completed by an approved intermediary and competent authorities. Approved intermediaries will be mainly experienced debt advisors attached to debt advice organisations, such as a the Citizens Advice Bureau.