Debt Management FAQ
What is insolvency?
Insolvency is the state of being unable to pay off any outstanding debts that you may have or, alternatively, the state of having liabilities that are worth more than your total assets.
There are various different ways of declaring insolvency but bankruptcy is probably the most well known.
How can I prevent insolvency?
While running into financial trouble is, sometimes, simply unavoidable, there are steps you can take in order to prevent your debt spiralling out of control.
The most important thing you should do is, rather simply, not to hurry into any loans or credit products and to carefully work out exactly what you can reasonably afford to pay back before you borrow.
There are also various insurance products available, like payment protection insurance and income protection insurance, which will protect you in the event that you become unable to continue earning enough money to pay off any unsecured debts that you are currently paying back.
What is an insolvency practitioner?
An insolvency practitioner is a legal or accounting professional who is appointed to take charge of a bankruptcy case or an individual voluntary arrangement.
Once you’ve been declared insolvent, the insolvency practitioner will be in charge of handling your assets and liaising with your creditors. During either bankruptcy or an individual voluntary arrangement, you will not have to deal with your creditors directly and indeed they are legally forbidden from continuing to harass or even contact you regarding the repayment of your outstanding debts.
What is bankruptcy?
Bankruptcy is a rather severe form of insolvency that should be treated as a last resort. It is essentially a declaration that you are unable to pay back all of your existing unsecured debts (i.e. debts that are not secured against any of your assets such as credit card debts, rather than something like a mortgage that is secured against your home).
Bankruptcy can be declared voluntarily, or you can be forced to declare bankruptcy by a particularly aggressive creditor (or creditors).
Once bankruptcy has been declared, responsibility of your relevant assets, as well as the responsibility of communication with your creditors, will be taken on by a trustee; either an official receiver or an insolvency practitioner.
While you are bankrupt, you will not be able to work as CEO or director of a company, or manage any business without first letting those you do business with know that you are bankrupt.
How long does bankruptcy last for?
A typical bankruptcy order will last for a year, after which you will be discharged. In some cases though, if you have enough surplus income, you may be required to continue to make repayments towards your debts for a further two years.
A note of your bankruptcy will remain on your credit file for six years following your discharge, making it more difficult for you to take out any kind of loan or credit card for that period of time.
What happens to my assets once I’ve declared bankruptcy?
When you are declared bankrupt, you commit to using a certain portion of your assets to contribute towards repayments of the debts that caused you to go bankrupt in the first place.
Exactly which assets can be taken and sold to raise the money can vary but will typically include:
- your beneficial interest in your property (that is, the portion of the property that you actually own, whether than be your share in a jointly owned property or the equity in a mortgaged property),
- certain possessions of sufficient value (e.g. cars), and
- lump sums of cash from pensions, bond, shares, bonuses, etc. This includes any assets you acquire while bankrupt, such as lottery winnings or inheritance.
You will be allowed to keep basic possessions necessary for living, such as furniture and bedding, and anything you use for work, such as tools or your vehicle.
Responsibility for the sale of the assets in question will fall on the trustee handling your case, and they are permitted to do so without your consent if they deem it necessary.
Note that you will often be required to pay a portion of your regular wage to your creditors, sometimes for up to three years after the bankruptcy order has been declared, so for two years after you have been discharged.
Can I use any credit while bankrupt?
While you are bankrupt, you will not be able to borrow more than £500 without first informing the creditor of your bankruptcy.
You will also not be able to take out a credit card until you are discharged from your bankruptcy order.
Even once you are discharged, you will find it harder to use any form of credit while the bankruptcy order is still noted on your credit report. In such cases, you should consider taking out a specially designed credit building credit card that will allow you to steadily improve your credit score over time.
Why do I have to pay to declare bankruptcy?
Declaring bankruptcy costs altogether around £700, but these costs can go up if you choose to involve a solicitor in the proceedings.
The costs go towards court fees and a bankruptcy deposit of around £500.
For residents of England and Wales, you pay £180 in court fees and a £525 deposit.
For those in Northern Ireland, court fees total £115, the deposit is the same at £525, and then a further £7 solicitor’s fee is also applicable.
Individual Voluntary Arrangements
What is an individual voluntary arrangement (IVA)?
An individual voluntary arrangement, or IVA, is a form of insolvency that amounts to a legally binding agreement between you and your creditors, via an insolvency practitioner, involving a set repayment plan.
An IVA involves settling as much as possible of your unsecured debt by extending the payment term, and reducing the monthly payments.
You agree an amount to pay each month, which is then divided up among your creditors.
Each IVA case will be managed by an insolvency practitioner, whose responsibility it is to help work out the exact payment plan, to manage the distribution of the payments themselves and to take charge of any liaison with your creditors. Once the IVA is in place, your creditors are no longer permitted to contact you or harass you regarding your payments.
As an IVA is a legally binding arrangement, in order for it to be put in place, you must acquire the consent of the creditor(s) to whom you owe 75% of your debt. Once these creditors have consented, the rest are legally bound to agree to the same terms.
Will I be able to keep my assets during an IVA?
The rules about which assets you may keep and which you must sell are much looser with an IVA than they are with a bankruptcy order.
Assets like your home and your car will be allowed to remain in your possession; though in some cases your insolvency practitioner may advise you to remortgage your property if doing so will release a significant enough sum of equity.
As a general rule, your repayment plan will be worked out based on your income, rather than your wealth in assets.
I’ve started an IVA but my creditors are continuing to harass me, what should I do?
Your creditors are not permitted to keep contacting or harassing you about repayments while your IVA is active. If they do so, you should keep a record of the contact, and should get in touch with your insolvency practitioner immediately. Your insolvency practitioner will then get in touch with the creditor in question and deal with the issue themselves.
I can no longer afford to make my IVA payments, what should I do?
If your financial situation changes while your IVA is still active and as a result, you find yourself no longer able to keep up with your agreed monthly payments, the first thing you should do is to contact your insolvency practitioner.
They will suggest to you a course of action that will be based partly on the reasons for you inability to continue to pay. You may be able to arrange a temporary reduction in your payment plan while you work to get back on your feet.
Alternatively, in the most severe of cases, you will be able to cancel your IVA altogether. Bear in mind though that if you do choose this option, then you will most likely find that the only thing you have left to do to cope with your debt problems is declaring bankruptcy, and so it is not a decision to be taken lightly.
My income has increased, should I tell my insolvency practitioner?
Absolutely, yes. Just as with a fall in income, you should inform your insolvency practitioner of any increase in your regular income. You may well find that this will mean you have to increase your monthly payments in line with your increase in income.
The same goes for any commission or bonuses you receive at work that are equal in value to at least 10% of your basic income. You are required to pass on at least 50% of anything above this 10% threshold.
- If you earn £30,000, and you receive a bonus worth £6,000, then of the £3,000 above the 10% threshold, you are required to give £1,500 to your creditors.
- Many IVAs nowadays will include a windfall clause. This means that if you are to come into a large amount of money unexpectedly, say though inheritance or a lottery, then that money must be passed on to you insolvency practitioner to be divided among your creditors to contribute towards the repayment of your debts.
What happens next?
Typically, an IVA will last around five years, but they can also end either when you have paid off your entire debt, or if you default on the payments altogether, in which case you will most likely be forcibly declared bankrupt.
A record of your IVA will remain on your credit file for a period of six years from the date it began. So if your IVA lasted for five years, then the record of it will remain for another year.
Debt Management Plans
What is a debt management plan?
A debt management plan, or DMP, is a non-legally binding agreement between you and your creditors that combines your existing unsecured, non-priority debts into a single monthly repayment plan.
Non-priority debts are unsecured debts that include things like personal loans and credit card bills. This is as opposed to either secured debts like mortgages, or priority debts like council tax or utility bills.
Because unlike an IVA, a DMP is not legally binding and is, in essence, an informal agreement, your creditors aren’t actually obligated to agree to the terms. However, they often will since it tends to be in their interest to do so, particularly when the alternative is you declaring bankruptcy and defaulting on your debts.
Do I need to pay to set up a debt management plan?
A debt management plan can be set up for free, by yourself, simply by speaking to your creditors and seeing if you can come to some kind of agreement.
You can also pay a fee to use the services of a debt management company. This can make the process easier and you may find that with the help of professionals, you could end up on a better plan, but it is not necessary, and you should always carefully balance the cost you pay with the actual service you receive.
Will a debt management plan be recorded on my credit report?
Generally, when you set up a DMP, the creditors involved will require that it is record on your credit file, though this is not always the case.
It can be a good idea for you to have it recorded on your report, since you will then also have its completion recorded, showing those who look that you made successful efforts to repay all of your debt.
Can I cancel a debt management plan?
Since a DMP is an informal agreement, you are, in theory, able to change the terms or to cancel the plan altogether at any point.
However, you should be careful if you want to do this, as you may find that your creditors become less willing to acquiesce to any future terms you propose if you do so.
Debt Consolidation Loans
What is a debt consolidation loan?
A debt consolidation loan is, as the name would suggest, a loan you can take out and use to pay off all of your existing debts, simplifying the repayment process so that you only have one payment to make each month.
Will a debt consolidation loan save me money?
The main idea behind a debt consolidation loan is that it gives you logistical benefits, rather than actually saving you money, as you still have to pay back the same amount.
You can apply for a loan whose repayment term is longer than those you are currently tied to, allowing you to spend less each month but, given the extended term and the interest added, you may actually end up paying back more money overall.