Personal Procedures

Where you are clearly insolvent, the right course of action will depend upon quite a number of factors:
Exactly how much do you owe to your creditors?
Are you in paid employment or self-employed?
Are you in a business partnership?
After payment of ongoing household expenses, is there a surplus of income at the end of the month?
Will the creditors be paid in full or must they agree to right-off a substantial part of their debt?
Do you know a third party/family member who will provide a lump sum payment to offer to creditors by way of a “full and final” settlement of all debts? i.e. creditors will accept less than they are entitled to in return for an early cash payment.
Procedures to be considered:
Individual Voluntary Arrangement [IVA]

An alternative to bankruptcy, where you can enter into a legally binding agreement with you creditors. Existing debts and interest are frozen once the IVA is accepted by creditors who thereafter cannot take legal action against you for recovery of outstanding debts. Usually you will pay surplus income over each month to a Supervisor who will then pay dividends to the creditors. Once the IVA is completed [usually after 5 years], any outstanding sums due to creditors are written off.

Debt Management Plan [DMP]

A DMP is an informal arrangement between you and your creditors. It is not legally binding and usually no part of the outstanding debt is written off. In addition, interest may continue to run on outstanding debts. A DMP will certainly reduce your existing monthly payment to creditors and is particularly useful if you just need a short stay [say 6-9 months] to sort out your financial affairs so that you can recommence payments at the normal contractual rate with each creditor. Unfortunately, creditors can change their mind at any time as well as commence legal proceedings at any time to recover their debt.

Administration Orders

Your total debts must not be more than £5,000 and one of your creditors must have obtained a County Court Judgement against you. On your application, the court may make such an order [the Administration Order], whereby you pay weekly or monthly payments into court and the court will then disburse the monies [after taking a fee of up to 10%] to your creditors. Details on how to apply for an Administration Order are available at your local county court.

Debt Relief Order [DRO]

The DRO is designed for Insolvent Individuals who have no assets [less than £1,000], little surplus income [less than £50 per month] and liabilities of less than £20,000. The court is not involved in DROs which is a scheme run by The Insolvency Service [a government agency]. The DRO lasts for 12 months and during that time creditors named in the order cannot take action to recover their debt. At the end of the period, the debts listed in the DRO will be discharged and the Insolvent Individual will be free from those debts. Please refer to the booklet “Guide to Debt Relief Orders” in our Library Section and visit The Insolvency Service web-site to see how you can apply for a DRO.

Bankruptcy

You can only be made bankrupt by a court either on your own application or more usually on the application of one of your creditors. Once the Bankruptcy Order is made, your assets will vest in the Official Receiver [an official in The Insolvency Service] who may call a meeting of creditors to have a Licensed Insolvency Practitioner appointed your Trustee in Bankruptcy. It is the Trustee’s role to realise your assets, including your matrimonial home, for the benefit of your creditors. You are usually discharged from bankruptcy after 12 months, although the administration of the bankruptcy can continue for several years after that date. There are certain rules called “bankruptcy restrictions” that you must follow whilst you are an undischarged bankrupt. For example, you cannot act as a director of a limited company or obtain credit in excess of £500 without first advising the provider that you are a bankrupt. It is a criminal offence to break the restrictions.

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