The truth about bankruptcy
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IVAs now make up more than half of all personal insolvencies, with more than 52,000 people entering into one last year.
The number of people entering into some form of personal insolvency has fallen to the lowest level since 2005, according to new stats from The Insolvency Service.
In 2014, a total of 99,196 people were made insolvent, down 1.8% from 2013. 20,318 people were made bankrupt, a sharp 17.3% fall from the previous year, and Debt Relief Orders (DROs) were also slightly down at 26,688. However, Individual Voluntary Arrangements (IVAs) were at the highest level they have ever been since they were launched in 1987, with 52,190 people entering into insolvency this way. IVAs now make up more than half of all personal insolvencies.
What’s the difference?
Insolvency means any formal debt solution, which in England and Wales is bankruptcies, DROs, and IVAs. Bankruptcy is the most serious form of debt solution, as it can sometimes mean people selling any non-essential assets, including their home if they own one, to repay what’s owing. Any remaining debts they can’t afford to pay are then written off. The continued fall in bankruptcies could be seen as good news, as more people may be tackling their debt problems earlier and entering into a different form of insolvency. However, some have suggested that the high cost of going bankrupt is also an obstacle to some people who could benefit from doing so. The number of people entering bankruptcy is likely to continue to fall as the government has announced new changes to the debt solution. The amount of debt at which you could be forced into bankruptcy by your creditors is currently £750, but it is set to rise to £5,000 later this year.
IVAs are also a form of insolvency but in most cases homeowners won’t be required to sell their property (although they may need to release equity). As with all debt solutions, entering an IVA will affect your credit score for the medium to long term and shouldn’t be entered into lightly. However, if you’re considering a formal debt solution, your credit score will most likely have already been affected by late payments or defaults, so this may be less of an immediate concern. If you enter into an IVA, you’ll pay as much as you can afford (after allowing for priority bills and living costs) towards the unsecured debts included in it for a set time, usually five years.
DROs offer people with lower debts and low assets an alternative to bankruptcy. It will still affect your credit score like bankruptcy and IVAs, but you won’t have to go to court to obtain one like you would to go bankrupt. It can actually be relatively expensive to go bankrupt, as you have to pay £180 in court fees and a £525 fee to the Official Receiver … though you may be able to get the court fees waived if you show you can’t afford to pay it.
DROs could be set to rise later this year as new rules will mean that you will be able to owe more and still apply for one. The maximum amount of debt you can currently have is £15,000, but this will rise to £20,000 from October. However, you still have to have a disposable monthly income of £50 or less, after all of your living costs have been deducted. Your assets must also total £300 or less, and you can own a car worth up to £1,000.
Seeking help early
If you’re struggling with debt problems, the best way to avoid insolvency is to deal with your financial worries as early as possible. It can be hard to confront your problem debt as it’s not something you want to think about, but talking to someone could help you to start to get back in control. By contacting a debt expert and talking through your worries, you can find out more information about the debt solutions which may be available to you.
by Kyri LevendiBack to blog home