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Choosing the appropriate option for Personal Insolvency

Choosing the appropriate option for Personal Insolvency. Insolvency statistics 2nd Quarter of 2011 . 30,515 insolvencies in England and Wales 2.2% decrease on same period as last year 11,113 bankruptcies 25.8% decrease on same period as last year 12,143 IVAs

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Choosing the appropriate option for Personal Insolvency

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  1. Choosing the appropriate option for Personal Insolvency 11 10 18 Bank IVA and DRO screenshow.pptx

  2. Insolvency statistics2nd Quarter of 2011 • 30,515 insolvencies in England and Wales • 2.2% decrease on same period as last year • 11,113 bankruptcies • 25.8% decrease on same period as last year • 12,143 IVAs • 9.8% decrease on same period as last year • 7,527 DROs • 15.3% increase on same period as last year

  3. Bankruptcy • Debtor's own petition = £700 • consists of deposit and court fee • possible exemption from court fee if in receipt of certain benefits • Creditor's petition • effects of bankruptcy are the same • only likely where the debtor has significant assets • Some debts survive bankruptcy • Court fines • arrears of child maintenance • criminal court orders • student loans

  4. Assets • All ‘property’ as defined in Insolvency Act 1986 ‘vests’ in the Trustee • Property will include: • endowments • ISAs and Tessas • savings, bonds and shares • all cash assets

  5. Assets • Certain key exemptions: • items for basic domestic needs • income for reasonable domestic needs (however where surplus income exceeds £20, an IPA/IPO will be sought and can run for a maximum of three years) • tools of trade (often a vehicle for getting to and from work) • pensions • compensation awards in respect of paid and suffering

  6. The home • Bankrupt's equitable interest has to be realised within 3 years • Can be done in a number of ways: • third party lump sum • spouse re-mortgage and purchase of bankrupt's interest • property sold voluntarily • forced sale of the property • Section 313 charge (if sale not cost-effective) • Equitable interest: • less than £1000 – Official Receiver will wait for three years to try to realise • greater than £1000.00 – bankrupt's family has occupation rights for 12 months, after which creditors' interests take priority

  7. Effects of bankruptcy • Order may not be advertised in the local press • Will be published in the Gazette and in the online Insolvency Register • Employment: • impact on profession (check contract, contact professional body, seek independent legal advice) • cannot act as a Company Director • self-employed individuals may have difficulty in obtaining trade credit

  8. Effects of bankruptcy • Tax code change • Bank accounts – operate at bank discretion • Future credit – disclose bankrupt status if borrowing more than £500 • Credit Reference agencies – record for six years from date of order • Discharged in a maximum of 12 months (but note that an IPO/IPA will continue for agreed period) • Bankruptcy Restriction Orders/Undertakings: • dishonesty/recklessness • extended restrictions for between 2-15 years

  9. Individual Voluntary ArrangementsBackground • Statutory alternative to bankruptcy • Repayment of a percentage of debt over a fixed period • Legally binding arrangement • All interest/charges are frozen • Stay on all legal action by unsecured creditors - no contact/enforcement • Possible to negotiate about how assets are realised (eg re-mortgage rather than sale of house) • Incorporates ‘debt forgiveness’

  10. Individual Voluntary ArrangementsCriteria • Insolvent (unable to pay debts as and when they fall due) • Unsecured debts • typically more than £15,000 • amounts owed to at least two unsecured creditors • Ability to make offer to creditors • regular income • reasonable disposable earnings

  11. Individual Voluntary ArrangementsWhat they involve Contributions • Monthly amounts • Potential for stepped payments during lifetime • no minimum monthly contribution • five year forecast with: • child care costs • benefit changes • HP/finance payment • End result achieves desired return to creditors

  12. Individual Voluntary ArrangementsWhat they involve Lump sums • Disposable income is low/non-existent • Third party offer – family/friend • Endowment • Pension lump sum • Compensation lump sum • Savings

  13. Individual Voluntary ArrangementsProtocols and equitable interest • Came into force on 1 February 2008 • Represents current best practice • Result of input from all stakeholders in IVA process • Introduced new approach to realising a client's equitable interest in property: • equitable interest to be calculated six months before IVA due to complete • if less than £5,000, any interest becomes an excluded asset and does not need to be realised • IVA would simply complete in final month of contract term

  14. Individual Voluntary ArrangementsProtocols and equitable interest • If equitable interest greater than £5,000, then the debtor is obliged to attempt to re-mortgage • Re-mortgage criteria: • maximum 85% loan to value • re-mortgage must be repayment in nature • cannot have extension to existing mortgage term • increase in monthly mortgage payment cannot exceed 50% of the monthly IVA contribution amount

  15. Individual Voluntary ArrangementsProtocols and equitable interest • Re-mortgage subject to following terms • age (at retired age no re-mortgage expected) • affordability • multiples of earnings • market conditions • credit check

  16. Individual Voluntary ArrangementsProtocols and equitable interest • If debtor cannot secure a re-mortgage facility: • possible extension of IVA by 12 months • further 12 monthly payments to be made or • third party can make contribution or • debtor can put forward alternative

  17. Debt Relief Orders (DRO) • Introduced in April 2009 • Aimed at providing a solution for clients with: • low income • few assets • Criteria: • debts of less than £15,000 • assets of less than £300 • a car worth less than £1,000 • less than £50 disposable income each month • £90 fee - can be paid over six month instalment period

  18. Debt Relief Orders (DRO)Effects • Essentially same as bankruptcy order • If circumstances change during term, can be revoked • Debtor's name will appear on the Individual Insolvency Register • Credit file impaired • Rent arrears must be included in the DRO

  19. Debt Relief Orders (DRO)Effects • Debt Relief Restriction Order can be obtained: • places restrictions for a period of 2-15 years • failure to co operate with Official Receiver can give grounds • Some debts survive DRO: • magistrates' court fines • child support and maintenance payments • student loans • debts incurred through fraud

  20. Contact Jane LodgeManager M 07966 495690E jane.lodge@uk.gt.com Choosing the appropriate option

  21. Thank you for your attention Any questions?

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