Being insolvent, i.e. being unable to pay your debts when they are due, can be very daunting for individuals but there are three main personal insolvency options that can be worked through, depending on your circumstances.
Individual Voluntary Arrangement
One option is to put forward a plan to your creditors to pay off all or part of your debts. Otherwise known as an Individual Voluntary Arrangement (IVA), this is an insolvency procedure which results in the renegotiation by an individual of the payments due to all of their creditors. If your IVA is approved, you will make scheduled payments to an Insolvency Practitioner (who acts as your supervisor), who will then divide the money between your creditors. 75% of creditors (by value of debt attending and voting) must vote in favour for an IVA to be granted.
Debt Relief Order
An alternative route would be to seek a Debt Relief Order (DRO). This is a potential individual insolvency solution aimed at helping people with debts amounting to less than £15,000; assets not exceeding £300 (gross); and little to no disposable income (not exceeding £50 per month). If you meet these requirements, you will not have to pay your debts for a specified period (usually 12 months) and at the end of this period, they will be written off. However, if your circumstances change so you are able to pay some / all your debts, the DRO may be revoked.
Finally, if you are unable to pay your debts and an IVA or DRO is not appropriate, you could apply to be made bankrupt. Alternatively, a creditor could petition for your bankruptcy. There are many implications to being made bankrupt, such as your assets being sold by the person appointed in your bankruptcy in order to repay debts; not being able to be a director of a company or being able to borrow more than £500 without telling the creditor about your bankruptcy. It is also a criminal offence to break the restrictions on your bankruptcy order. The bankruptcy can stay on your credit reference file for 6 years from the date of your bankruptcy.
Being made bankrupt used to carry a stigma with it but that is not the case anymore. People understand that it is a debt respite tool and it does offer a clean slate for people struggling with their debts. Bankruptcy lasts for a period of one year (unless there are circumstances existing which justify extending the bankruptcy). At the end of the bankruptcy, you will be discharged from most of the debts you owed at the date of the bankruptcy order but, depending on your income, you may be asked to make payments towards your bankruptcy debts for at least 3 years.
If you are struggling to pay your debts and would like advice on next steps, we urge you to speak our insolvency team at Farleys, a debt charity such as Step Change or to an Insolvency Practitioner. People in financial difficulty should not pay for debt advice there are plenty of resources available to debtors to ensure that advice is provided free of charge.