What is Insolvency?
If you are seriously in debt, then the term insolvency will start to crop up.
Don’t panic – here at Compare UK Quotes we can help you understand the situation, look at the available options and give you the information you need to make a responsible decision.
An insolvency definition
Insolvency is the term given when an individual or organisation cannot afford to pay its bills and debts on time.
Personal insolvency typically happens when you are so behind in your debt payments that you have no choice but to ask for help in some way.
Often, the help you are looking for is for the debts to be wiped away, but while that can happen, it only takes place once all other options are exhausted.
Those options form the basis for the different types of insolvency in the UK.
Differences in Scotland
Laws in Scotland are such that they differ from the rest of the UK in specifics, though the general feel for them is similar.
If you live in Scotland, then it is important that you check elsewhere for the laws – while the insolvency meaning and general advice given in this article will still be helpful, the exact legal situations may differ.
What causes insolvency?
The spiral of debt can often be difficult to control.
Interest and charges can push a previously-manageable level of borrowing into chaos and the build-up of months and even years of struggle, where income isn’t enough to meet outgoings can lead to a simply frightening situation from which it seems there is no escape.
Insolvency isn’t the bad guy it is sometimes painted to be. In fact, insolvency proceedings can be something which resets your finances and lets you shake off the worries of years.
However, it is a very serious undertaking which really should be seen as a last resort, so it’s important not to jump into it without a full understanding. Discussing your situation with an insolvency practitioner will help you see if it’s the right move for you.
Insolvency in the UK – What are the options for insolvency?
There are various levels debt management help available in the UK, each of increasing severity. It is always hoped that the problem can be solved with help before moving to the next level.
Personal debt management
At the top of the list is simply you being able to sort your debt issues yourself.
One of the pieces of advice we always give here at Compare UK Quotes is to communicate with your debtors.
Hopefully, by discussing the situation with them you can reach an agreement that works for you both far in advance of any further problems.
Read our articles on budgeting, debt consolidation and other personal finance pieces for help in debt management.
Debt management plan
A debt management plan is an arrangement made with a third-party finance company to have them undertake the administration of your debts.
You pay a regular payment to them and they then divide up the money to ensure all your creditors get paid back.
It’s a good way to help you manage multiple debts and have someone else work with your creditors on your behalf.
A debt management plan does not involve court proceedings, but merely shows your willingness to resolve your difficult debt issues.
For more information on debt management plans, read our article on the subject.
An administration order
If you owe less than £5,000 and have county court judgments (CCJs) placed against you then you can apply for a court administration order. This will involve you paying a monthly sum and a fee to the court that will then pass the money on to your creditors.
An administration order is considered more serious than a debt management plan as it involves a court and consequently is more significant on your credit history, and is a form of insolvency.
Debt relief order (DRO)
A debt relief order is the second of the four forms of insolvency available in England, Wales and Northern Ireland and is for people who owe £20,000 or less and do not own property. It comes with a number of restrictions.
Individual voluntary arrangement (IVA)
An IVA is a form of insolvency that can seem a lot like a debt management plan, though it comes with significant legal backing which has implications both in terms of your protection and your commitment.
You will have to pay off your debts for a number of years as part of your IVA (usually five or six), but any outstanding debt at the end of the term will be wiped clean, allowing you to start again debt-free.
Going bankrupt is a very serious undertaking. It will involve the sale of your house and any other assets and can mean the loss of any business that you own.
The main advantage of going bankrupt, however, is that it wipes out all your debt. If your borrowings are significantly higher than your assets and income then it could be the only way out of the problem.
Many people confuse bankruptcy with insolvency, but the difference between insolvency and bankruptcy is significant – insolvency relates to the many different options available to you that involve legal intervention, where bankruptcy is only one of those options (the most significant one).
This confusion can arise as historically bankruptcy was the only option available. As time goes on, the British government continue to seek more appropriate means to deal with debt rather than forcing everyone down this desperate path.
What does it mean to file for insolvency?
Any form of legal debt insolvency will put your name and details on the publicly-searchable insolvency register and affect your credit history for six years following the final payment of the insolvency.
Thus, if you undertake an IVA that takes six years to clear, your records will be affected for a full 12 years from the start date.
Insolvency law is not flippant and entering into any sort of insolvency should be seen as significant undertaking. It is always recommended that you get insolvency advice from a registered practitioner before going forward with the application.
A registered insolvency service will be able to offer you detailed advice based on your exact circumstances. It is important that you are completely honest with them at all times so that they can best help you, no matter how upsetting you may find the details.
What is company insolvency?
Just as you can become personally insolvent, so too can a company. If its debts have mounted up such that they cannot be paid, then the company can be declared insolvent. The insolvency definition for businesses is identical to that for individuals.
An insolvent company typically closes its business and ceases trading, though the assets can be bought up during liquidation and the company retooled and saved.
What does being on the register of insolvencies mean? How will it affect my credit?
Your credit history is key in any future borrowing, whether that’s as small as a mobile phone contract or as significant as a mortgage on a house.
You will find it much harder to get credit in the years during and following your insolvency – any major borrowing will be subject to an insolvency search.
In the UK, credit reports only remain on your file for six years, no matter how severe, so any insolvency will become little more than a memory after six years and you will be able to go on with your financial life finally unaffected.
Does insolvency wipe out debt?
Debt recovery orders, individual voluntary agreements and bankruptcy all have a measure of debt clearance as part of their process, however it should be understood that you would be expected to pay as much as you possibly can before any debt is wiped.
There is no system in the UK for a debt being deleted if you are in any sort of position to pay it.
Does debt disappear after some years?
Unless you enter an insolvency arrangement, debt will never simply go away.
The law states that companies cannot take you to court for payment of a debt where the last contact regarding it was more than six years previously, but that doesn’t stop them asking for it, or selling it on to a debt recovery agency (though they, too, won’t be able to apply to court regarding the owed money).
In short: no. The debt will fall from your credit history after six years and no longer affect future credit, and the courts will not help your creditors, but you still owe the money.
Who can declare insolvency?
You can apply for insolvency yourself, through the gov.uk website, however it is strongly recommended that you involve a registered insolvency practitioner to help you through the process.
Not only will they be able to advise you on the right course of action, but they will also be able to initiate the process in the correct manner.
It is also possible to have bankruptcy forced upon you by your creditors, though this situation is rare as the creditors themselves will likely not have their debt repaid if they follow this path.
If any of your creditors are threatening this action, you should immediately get advice from an insolvency practitioner who may be able to step in and move to a far more suitable insolvency plan.
How do you declare insolvency?
If your debt worries are significant enough that you are asking yourself how you claim insolvency, then you should speak to a debt specialist straight away.
If possible, see if a debt management plan is a reasonable option as this will keep you off the insolvency register and allow you to recover your credit far swifter than a more serious option.
Should this path be closed to you, you should contact an insolvency practitioner and get their advice as described above.
Remember that many will offer free initial consultations, understanding that their clients may not be in a position to immediately pay for services. They will also have manageable payment schemes that don’t require you to find money upfront.
All insolvency options come with a fee, whether that’s per payment for an arrangement order or a £680 immediate court fee in the case of bankruptcy.
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For more information on the various types of insolvency, look to our articles coming soon!