A Short Guide to Individual Insolvency
‘Today, certain people file for bankruptcy, businesses and individuals, and it no longer has the stigma it once had. Now it's … considered wise, a way to regroup and come back again.’ – David Dinkins
The main law that governs corporate insolvency in England and Wales can be found in the following statutes:
- Insolvency Act 1986; and
- The Insolvency (England and Wales) Rules 2016.
When does an individual become insolvent?
Simply put, an individual is insolvent if they do not have sufficient assets available to discharge their financial liabilities and debts.
The court will usually presume an individual to be insolvent if:
- A creditor has served a statutory demand on the debtor for a liquidated debt equal to or exceeding £5,000 and 21 days have passed since the demand was served, without the debtor complying with or setting aside the demand; or
- The debtor owes the creditor a judgment debt equal to or exceeding £5,000 the bankruptcy level and the creditor's execution or other legal process issued for that judgment debt has been returned unsatisfied in whole or in part.
What can an insolvent individual do?
Bankruptcy is a formal individual insolvency procedure. The purpose of bankruptcy is to grant relief to the bankrupt individual and fairly distribute their assets among their unsecured creditors to pay towards or for the debt.
An insolvent individual needs to apply online for their own bankruptcy order. A creditor can also issue a bankruptcy petition against an insolvent individual.
After the order is made a ‘trustee in bankruptcy’ is appointed. The assets that the bankrupt individual had make up their estate which can be managed by their trustee in bankruptcy.
During bankruptcy, the individual’s ability to trade and obtain credit is restricted, usually for 12 months. After this time, they are discharged from liability for their bankruptcy debts. The trustee's realisation and distribution of assets and administration of the bankrupt's estate may take longer than a year and so the bankruptcy will last longer and will show on any credit files or records for many years thereafter.
Individual voluntary arrangement (IVA)
An IVA is a statutory agreement between the creditors and the individual. The agreement usually compromises and provides a framework for the settlement of the debt.
An individual may propose an IVA to all of their creditors and may seek an order from the courts to ensure the creditors vote on the IVA before they take recovery action against the insolvent individual. The IVA will need the approval of more than 75% of creditors (in value) to agree to the conditions to make it binding. If accepted, it is binding on all creditors.
In addition to the above, an insolvent individual, who has no debts arising from carrying on a business and with modest means may:
- Apply for a debt relief order, which prevents creditors from enforcing debts against the individual for one year. After this year, the liability for this debt is discharged.
- Apply for an administration order, which allows the insolvent individual to make scheduled repayments to the creditors, who cannot enforce their debts for five years. After this period the liability for those debts are discharged.
Ask the operator of a debt repayment scheme to create a debt repayment plan known also as a “debt management plan” to prevent the need for an IVA. This may allow the insolvent individual to pay only a proportion of the amount they owe over a set period of time to repay all of the debt without further enforcement action taken against them.