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In the current economic climate managing personal finances is for many people harder than ever, with an increasing amount of people facing the prospect of personal insolvency.
Most people are already familiar with the concept of bankruptcy as a way of dealing with debts that cannot be paid, whether that process be initiated by a creditor seeking to recover monies owed from an individual or by the individual itself seeking to be freed (subject to some restrictions) from overwhelming debts so as to make a fresh start.
However, there are a number of other alternative procedures to bankruptcy that could possibly be considered which may actually be better for both the individual in debt and its creditors. These include reaching an informal arrangement with creditors or applying for an Administration Order (a Court based procedure to be used where one or more creditors have obtained a Court Judgement against the individual). There are, however, two further alternatives.
Debt Relief Orders
Since 6 April 2009 an individual can now, in certain circumstances, apply for a Debt Relief Order (“DRO”). Broadly speaking, a DRO provides debt relief, subject to some restrictions, for individuals who do not own their own home, have little surplus income and assets and have less than £15,000 of debt.
An application for a DRO currently costs £90 and a DRO lasts for twelve months, during which period creditors named on the Order are unable to take steps to recover their money without an Order of the Court. At the end of that period, if the individual’s circumstances have not changed, they should be released from the debts included within the Order.
The process is considered to be a cheap and accessible form of debt relief. However, DRO’s do not involve the Courts and can only be applied for through a skilled debt advisor - an “approved intermediary” - who is approved to give advice on DRO’s.
Individual voluntary arrangements
Rather than reaching an informal arrangement to repay creditors, an individual voluntary arrangement (“IVA”) is a formal proposal to creditors to pay part or all of the debt owed. This is a Court based procedure and is applied for through an authorised insolvency practitioner.
Any agreement reached with creditors is binding upon them and whilst in force and it is intended to prevent creditors taking bankruptcy proceedings against the individual.
This procedure is designed to give the individual more say as to how their assets are dealt with and how payments are made to creditors, as well as to avoid some restrictions which apply to a bankrupt. Overall, the costs are also generally likely to be less.
The above summary sets out some of the options that are available but ultimately detailed advice should be sought at the earliest opportunity from a suitably qualified insolvency practitioner or debt advisor who can provide specific advice to the individual in the light of their personal circumstances. Further information can also be obtained from the Insolvency Service at their website www.insolvency.gov.uk.
Patrick Jenkins is a solicitor in the Litigation Department of MacDonald Oates, based at the firm’s Petersfield Office. His practice includes all aspects of civil and commercial litigation, including both personal and corporate insolvency litigation.
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