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What options do you have when you can’t pay your creditors

So, you have significant personal debts that you are unable to pay which is leading to stress and sleepless nights – you can take comfort in knowing that you are not the only one!  Personal insolvencies are increasing.  In the third quarter of 2016 personal insolvencies jumped nearly 20% compared to the same quarter in 2015.  The reason for this rise is principally due to a 23% rise in Individual Voluntary Arrangements (IVA’s).  The number of bankruptcies in 2016 fell due to the minimum amount a creditor must be owed rising from £750 to £5,000 in October 2015.  However the bankruptcy application process changed in 2016 making it easier for creditors to petition and could result in the number of bankruptcies increasing this year.

You may be struggling to pay your debts because of matters out of your control - you may have lost your job and therefore have no income to pay your debts.  You may have incurred significant liabilities as a result of personal guarantees you provided on company obligations.  Perhaps you were fooled by the flashing lights of payday loans without fully understanding the amount of interest that would be charged and now the debt is beyond a level you can cope with.  No matter how you got in to the position, you need to deal with it immediately.  If you deal with your financial position sooner rather than later, the better the likely outcome will be for you and your creditors.

Your creditors must be owed £5,000 if they wish to petition for your bankruptcy, however, even if they are not owed this much they still have a number of options available to try and recover their money including applying to court ordering the money to be paid.  If you do not have the means to repay the debt a bailiff could be instructed to attend your home to recover goods owned by you.

Some of the options available to you to deal with your finances are:-

Informal arrangement

Come to an agreement with your creditors to repay the debts over time or repay what you can afford.  This can sounds great, but if you have say 20 creditors you owe money to, you need to reach an agreement with each one and make sure you stick to the deals you have made.  If one creditor decides not to play ball, it could put in to jeopardy the other agreements you have in place.

Debt relief order (DRO)

DROs are specifically designed for people with few assets and a relatively low level of debt.  You must owe less than £20,000 and have assets less than £1,000, a car worth no more than £1,000 and not a homeowner.  If you fit the criteria a DRO will freeze your debt repayments and interest for 12 months and if your financial situation hasn’t changed at the end of the period, the debts will be written off.

Individual Voluntary Arrangement (IVA)

Propose a voluntary arrangement, where you reach an agreement with your creditors.  You put a proposal to them to repay all or some of the debt over a period of time and they decide whether to accept or reject the proposal.  All creditors are tied in to the arrangement as long as 75% in value agree it at the outset.  An IVA is managed by a licenced insolvency practitioner who acts as supervisor of the arrangement.  You make payments to the supervisors in line with your proposal who then will pay dividends to your creditors after settling the costs of the arrangement.

Petition for your own bankruptcy

Rather than waiting for one of your creditors to issue a petition for your bankruptcy, you may decide to do it yourself.  Although this may seem like a strange thing to do at first, you may be in a position where you want to deal with the debts rather than have them hang over you.  Once a bankruptcy order has been issued you will need to provide information to the Official Receiver, who will deal with your affairs.  There are restrictions once you are made bankrupt, such as you cannot borrow more than £500 without telling the lender you are bankrupt, you cannot act as director of a company or create, manage or promote a company without the court’s permission.  Generally bankruptcy restrictions last for 12 months but they can be extended if you don’t carry out your duties under the bankruptcy proceedings or if you’re found to have acted carelessly or dishonestly.

Do nothing

You will effectively just sit there and wait for your creditors to take action.  This means that the debts will be hanging over you, likely causing a great deal of stress for you and your family until your creditors take action to recover the money owed to them.  Not something we would recommend.

Whatever your personal financial position, we always recommend seeking professional advice early as this means there will be more options available to you.  Also by acting earlier, creditors will likely be more accommodating to any proposal you put to them as they would not have incurred a significant amount of time and money chasing you for repayment.

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