Dealing With Debt: Insolvency
WHAT IS MEANT BY INSOLVENCY?
The official definition is, that you are considered to be insolvent if you are unable to pay your debts as and when they fall due.
If you are insolvent in England or Wales, there are 3 formal remedies. An Administration Order, an IVA, or Bankruptcy.
There is 1 informal remedy known as a Debt Management Plan.
You can apply for an Administration Order (AO) if you have at least two debts, your debts do not exceed £5,000 and you have at least one County Court Judgment or one High Court Judgment. An AO covers all your credit debts including any council tax/community charge arrears.
An AO deals with all of your creditors on your behalf and it is administered by your local County Court. Whilst the order is in place, your creditors cannot take any legal action against you, without the permission of the Court.
There are no hard and fast rules regarding an AO and the process differs slightly from Court to Court. This is normally at the discretion of a District Judge. Generally however, your debts will be assessed by the Court in accordance with your ability to pay. You should state how much you can afford to pay, or the Court will calculate the amount for you. You then pay this amount into Court on a monthly basis. The Court will then make payments periodically, to your creditors.
There is no application fee to pay when applying for an AO as the Court's fees are deducted from the monthly payments that you make to Court. The Court fee equates to 10% of the money that you pay to them. You need to make an application for an AO on Form N92. The form consists of four pages which you should fill in and take to your local County Court. Do Not sign the declaration at the bottom of page 4 until you are asked to do so in the Court as this has to be witnessed by the Court staff.
Once your application has been made, the Court will inform your creditors that you have applied for an Administration Order and they will have 16 days in which to lodge any objections. If a creditor objects, your AO will not be rejected out of hand, but you will likely have to attend a hearing in Court. The Judge will then decide if your offer is reasonable and will make the appropriate order. Once the order is made, your creditors can take no further action unless you default on the payment.
An AO will continue until you have paid the amount off in full, however, if you are only paying a small amount each month, your AO could go on for many years. At the time of your application, the Court may consider that a Composition Order (CO) may be appropriate. This means that instead of paying the full amount of the debt, you will only have to pay a percentage. If the Court does not automatically make a CO, you can make a separate application later, using form N244.
A CO usually lasts for 3 years. To calculate your offer, work out how much you can afford to pay once you have paid all of your essential debts (rent, council tax, food etc) and then mulitply this figure by 36. Deduct 10 per cent from this figure, which will be the Court fee and then convert this into a per centage.
e.g. Total debt = £4,000 - You can pay £40 per month - 40 x 36 = £1440 deduct 10 per cent - 1440 -144 = £1296. Convert this to a percentage - £1296 x 100 = 129600 divided by 4000 = 32.4 Your proposal therefore would be rounded up to 33p in the pound.
Individual Voluntary Arrangement (IVA)
An IVA is not primarily designed to get you out of financial trouble, it is designed to give your creditors a better return than they would achieve, if you were to declare bankrupt. So perhaps your first consideration should be, what do I stand to gain by proposing an IVA rather than declaring bankrupt?
First, Insolvency Practitioners, like solicitors and other professionals, charge for their services. It is not usual that you will have to pay upfront fees to an Insolvency Practitioner as their fees are agreed with the creditors, but ultimately you will pay their fee out of the contributions that you make, on a monthly basis.
The average fee for an IVA is around £8/9k, this is paid in addition to the sum agreed with your creditors.
Generally, the minimum that creditors will accept on an IVA is 25% of the total debt owed, more and more are setting the minimum they will accept to around 40%. But it all depends on how all the creditors vote on what is acceptable. For a proposal to be accepted 75% of the creditors voting have to agree, if the result is positive then the rest of your creditors are bound by this.
So, as a general rule of thumb, lets say that you owe £60,000. The minimum that you could expect to successfully propose in an IVA would be 25% of that figure, plus £8k IP's fees, therefore, £23,000. Divide this over the usual term of 60 months and this would equate to around £384 per month.
It is also now common for homeowners to have a clause inserted that they remortgage at the end of year 4 or 5, to introduce a further lump sum into the pot.
However, this is only asked if the debtor can afford to re-mortgage and if this is not the case, the IVA merely continues for a further 12 months, after which, any balance remaining is written off.
An IVA is useful to you if you have significant assets to protect and there is a high risk that you would lose those assets if you declared bankrupt
Bankruptcy is a right that an individual has, in Law, to divest themselves of the crippling burden of debt. By declaring Bankrupt, the Law will write off all of your debts (with a few exceptions, such as fines or student loans) and your creditors will have no legal right to pursue you for them. However, Bankruptcy is not a 'get out of jail free' card and it does come with some downside, but just how much it will affect you is subject to your circumstances.
If it is your first Bankruptcy, you will be subject to the rules of Bankruptcy for a maximum of 12 months from the date that you were made Bankrupt in Court. If your bankruptcy is straight forward, i.e. there are no significant assets to be dealt with and you have not acted fraudulently in anyway, there is a chance that you will be discharged early, in which case, your discharge would occur sometime between 6 and 8 months. If you have no significant assets, then the Official Receiver will likely become your trustee and will administer your bankruptcy.
If you are employed, you may be subjected to an Income Payments Arrangement (IPA) and this is calculated by taking your essential expenditure (e.g. rent, rates, food, gas, elec etc etc) from your income and what is left is your residual income. Any residual income would be subject to an IPA unless it is clear that the trustee would not get at least £50 per month. The IPA is officially 60% of your residual income, so, if for example you earned £1000 per month and your essential outgoings came to £800 per month, this would leave you with £200 per month and you would be expected to pay £120 per month to your trustee and you would be allowed to keep the balance of £80 per month. IPAs are not cast in stone and they can be varied (up or down) if your circumstances change or even cancelled altogether if for example, you lost your employment. IPAs last for 36 months from the date of your bankruptcy.
When you declare bankrupt, you will be put on an NT tax code, which means that you do not pay any tax to the inland revenue for 12 months. The bad news is that you don't get to keep this money, so make sure you don't spend it. Keep it safely set aside as you will be contacted by your Trustee and told to pay it over.
As a bankrupt, any assets that you have, such as a property, savings, shares etc, will automatically transfer to your Trustee. Many people think that if they declare bankrupt and they own a property, that they will automatically lose the property. This is not necessarily the case and in fact it is rarely the case. The trustee has 36 months in which to realize the asset so it is highly unlikely that your home would be at risk straight away (it would usually take about 12 months to have someone evicted in any event, particularly if children were involved). Any third party (anyone but the bankrupt themselves) can make an offer to purchase the bankrupt's beneficial interest in the asset. i.e. If you had a joint mortgage and there was say £20,000 equity in the property, half of the equity would belong to the joint mortgagee, so that would be safe. The bankrupt's equity (the remaining £10,000) would have to be purchased from the Trustee. Now this does not necessarily mean that the third party would have to pay £10,000, they could negotiate a significantly cheaper price.
BROs – Bankruptcy Restriction Orders.
A Trustee has the right to apply to the Court for a Bankruptcy Restriction Order if you do not co-operate with your trustee or you have acted irresponsibly or fraudulently. A BRO can last anywhere up to 15 years and in effect, it keeps you under the rules and restrictions of bankruptcy for the duration of the BRO. To get a BRO you would have to do something idiotic or downright criminal. For example, if you all of a sudden took it into your head to apply for 6 credit cards and you then proceeded to max them all out on a world cruise, went to the best restaurants and generally blew the money on having a good time, there is no doubt that this would be viewed as irresponsible and it is likely that a BRO would be imposed. Alternatively, if you deliberately falsified documents to obtain credit, then this is fraudulent and again, a BRO is likely to be imposed. You would NOT be subject to a BRO for example, because you had not filled in a tax return for a couple of years or you had used one card to pay off another.
Debt Management Plans – DMP
If you can take the time to write to all of your creditors and provide them with a statement of affairs and include a proposal that is in line with your ability to pay, then it is an alternative to a formal remedy. However, as they are an informal remedy, it does not bind the creditors to the agreement and they can change their minds as and when it suits them. DMPs are appropriate if you can pay off the debt in full within a five year period or if you need a short term solution and there is a possibility that you can revert to normal payments within say a two or three year period.
1. If your debts are under £5000 then you should be looking at an administration order or maybe a DMP
2. If your debts are over £5000 but under £15000 then a DMP would probably be appropriate
3. If you have assets that you want to protect or your employment restricts you from bankruptcy, you have more than 3 creditors and you have debts of over £15,000 and can afford to pay £200 per month, then an IVA may be appropriate.
4. If you have significant debt, you have no assets to worry about and you are unemployed with no realistic prospects of gaining employment in the foreseeable future, or your employment does not exclude you from declaring bankrupt, then bankruptcy should be a prime consideration.
More information can be found here
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