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Tackling your debts

What does insolvency mean?

Posted 03 May 2016 by Christine Walsh

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Unsure about insolvency? Learn what it is in our latest blog.

If you’ve got problem debt and you’ve been doing some research into how to deal with it, you may have come across the term ‘insolvency’. But what exactly does it mean?

When you’re insolvent, it simply means that you’re unable to repay your debts. There are however a few different routes into insolvency, and that’s where it gets more complex.

What are your options if you’re insolvent?

Being insolvent can be stressful and if you’re in this situation you probably have lots of questions about what you should do next.

There are solutions designed to help people who are insolvent, so it’s really important that you know what they are and get professional advice on which might be suitable for you.

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Debt Solutions

There are a range of debt solutions out there which, in the right circumstances, can help people who either can’t repay their debts at the rate they originally agreed or can’t repay everything they owe at all.

Let’s have a look at three of the formal solutions available in England, Wales and Northern Ireland that are designed to deal with insolvency: Individual Voluntary Arrangements (IVAs), Bankruptcy and Debt Relief Orders (DRO). If you live in Scotland, Trust Deeds and Sequestration are similar alternatives. Visit our Scottish Debt Solutions page to learn more.

IVAs

An IVA is one way to deal with insolvency. This is a solution that allows you to come to a new repayment agreement with your unsecured creditors. An IVA normally lasts five to six years and, once it’s over, what’s left of your unsecured debt on the plan is written off.

While you’re on the IVA, the disposable income you have at the end of the month would be put towards paying off the debts included in the plan. Your IVA provider would make sure this is an amount you can afford.

Six months before the end of the IVA, you are expected to try and release equity from your home – if you own it - and put that money into your IVA. But if you are unable to do so, the IVA would simply be extended for up to another 12 months instead.

There are fees involved in an IVA – see here for more information.

So, IVAs can work to deal with insolvency by allowing your repayments to come down to an affordable level and then writing off the remainder of the debt once the IVA is successfully completed.

Bankruptcy

Bankruptcy is another way to deal with insolvency, but there are some key differences between this method and IVAs.

First of all, you don’t necessarily have to make payments towards your debts each month, as you would with an IVA. Your bankruptcy is overseen by a Trustee (a court official) and if they see that you can’t afford to put anything towards your debts each month, you won’t be expected to.

Bankruptcy normally lasts for a year, and after that year is up the rest of your unsecured debts included in the order are completely written off.

Be aware that your assets are at risk if you go bankrupt and you may have to sell your house and put the money towards your debts.

You can only apply for bankruptcy online and it costs £655 in total, although that can be paid in instalments. Have a look at this Government page for more info.

So again, bankruptcy can deal with insolvency by either lowering or suspending your payments and then wiping your debt off after a year.

DROs

Debt Relief Orders are a cheaper alternative to bankruptcy – it costs £90 instead of £655 - but the criteria you have to meet to qualify is quite strict.

You have to have unsecured debts worth under £20,000 and less than £50 spare each month to put towards those debts.

You can’t have assets worth more than £1,000, which includes any savings, or a car worth more than £1,000.

If you qualify for a DRO, you are never expected to put anything towards your debts while the DRO is ongoing – your payments are completely suspended. If your financial situation has not improved after that year, your debts are written off.

DROs are meant for those who are really struggling with insolvency and unable to put anything towards their debts. Like bankruptcy and IVAs, DROs write off debts once the solution is successfully completed.

Am I insolvent?

Before you think of yourself as insolvent, it’s important to check that there  aren’t any changes you could make that would free up enough money for you to be able to afford your debt repayments, like taking on more work or cutting back on spending in certain areas.

If you’re confused about your situation and which way forward is best – don’t be. Why not get in touch with one of our debt advisors using the options to the left? They’ll listen to what you’re going through and make sure they recommend the very best course of action for your particular circumstances.

The most important thing to remember is that it’s definitely possible to recover financially from being insolvent, as long as you address the issue and get the help and support you need. 

by Christine Walsh

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To find out more about managing your money and getting free debt advice, visit Money Advice Service, an independent service set up to help people manage their money.