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A guide to personal insolvency

If you’re struggling with overwhelming debts and don’t know what to do, there are people you can turn to for free help and debt advice.

Usually you will be advised to take one of the following five options, depending on the severity of your debts and your personal circumstances.

Debt management plan

This is the best option if you have unsecured debts that you can only afford to pay off a little at a time, or if you are in trouble now but expect your situation to improve in the next few months. A debt management plan (DMP) involves either negotiating lower payments with your creditors yourself, or getting a debt management company to do so on your behalf – usually for a fee. In the latter case you will normally have to tell the company about all of your debts, assets and income, in order for them to speak to your creditors and ask them to agree to the new payments – which they can refuse. Then, the debt management company will collect your payments and share them out between the different creditors.

Things to note

Unless stated in your written agreement, your creditors still have the right to demand payment in full at a later date, or to take further action even if you keep up payments. It’s also important that you understand the debt management company’s charges – you may be charged a single set-up fee or a handling fee every time you make a payment.

Administration orders

These are for dealing with county court judgments (CCJs) or High Court judgments (HCJs) against you for two or more debts worth up to a combined maximum of £5,000 with interest and charges. To get an administration order you need to complete an application form, then the court will decide how much you have to repay, your monthly repayments and the payment term. You will then make a monthly payment to the court that they share between your creditors. The creditors can’t make any further demands without the permission of the court.

Things to note

You will have to pay a fee each time you make a repayment, but the total fees can’t exceed 10% of the debt. If you fail to keep up repayments, the court can contact your employer to deduct the payments from your wages, or cancel your order. The order will also appear on the register of Judgments, Orders and Fines for six years, and may affect your ability to get credit during that time.

Individual Voluntary Agreement

This is suitable if you have large debts and want to prevent your creditors taking action against you, but don’t want to be declared bankrupt. Similar to a debt management plan, an IVA is independently managed by an insolvency practitioner, who will look at your debts, assets and income details before deciding how much you pay and how long the agreement lasts. The IVA will only take effect if 75% or more of your creditors agree to it, and will still apply to those that didn’t.

Things to note

You will usually have to pay a set-up fee and handling fees for each payment, so make sure you understand the total cost. If you don’t keep up payments the insolvency practitioner can cancel the agreement and make you bankrupt. Your IVA will also appear on the Individual Insolvency Register.

Debt Relief Orders

These can help you manage debts up to £20,000, if you have under £50 a month disposable income and less than £1,000 in assets. To get a DRO you need to apply to the Official Receiver, an officer of the bankruptcy court, via an authorised debt adviser. The Official Receiver will charge a fee of £90 - your debt adviser will tell you when it needs to paid and if you can get help paying it. A DRO means you won’t have to pay certain debts for a fixed period, usually a year. At the end of this time the debts included are written off and you don’t have to pay them – unless your circumstances have changed. You will still pay regular commitments like rent, bills, secured debts, government loans, child maintenance and licence fees.

Things to note

If you run up further debts or break the restrictions after you get a DRO, you could be declared bankrupt or face prosecution. The restrictions include not being able to run a business without court permission, not applying for overdrafts or loans over £500 without telling the creditor you have a DRO, and not writing cheques you know will bounce. Break these restrictions and they can be extended for up to 15 years. Once you have been given a DRO you cannot apply for another for six years, during which time it will appear on your credit file.

Declare yourself bankrupt

Bankruptcy is the last resort for people with significant debts and personal assets that can be used to pay your creditors. To declare yourself bankrupt you need to file a petition and a statement of affairs with your local county court. They will need three copies of each form, plus a £525 management fee and £180 for court costs – although you may be able to get help with the fees. When the court has filed your petition, you and your creditors will be invited to a hearing where a bankruptcy registrar or district judge will make their decision. If your petition is approved, you’ll be declared bankrupt. Once this happens, you will have to hand over your assets to either the Official Receiver or an insolvency practitioner, who will sell them to pay off your bankruptcy debts, beginning with any secured debts. Assets may include your share of any properties, as well as bank accounts and pensions, but you can usually keep household contents, tools or a vehicle necessary for your job. After 12 months the bankruptcy order will be cancelled and any unpaid debts written off.

Things to note

Bankruptcy is subject to similar exceptions and restrictions as a DRO, and you will still have to pay your regular household expenses. You may also be restricted from running a business or getting credit, unless you clear all of your bankruptcy debts. You will also need to apply for a Certificate of Discharge if you want to apply for a loan or mortgage after the bankruptcy period. These cost £70 for three, with additional copies at £10 each. Bankruptcy will appear on your credit report for six years, and you will have to write to Land Charges and the Land Registry to lift any restrictions on properties you still own following your discharge.


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