There are currently three ways to go insolvent in Englandand Walesand you’ll find a summary of them here. If you’re looking for a more comprehensive guide, you can find more insolvency information here http://www.debtadvicenow.co.uk/docs/indebt-web.pdf. Different rules apply to insolvency in Scotland.
An Individual Voluntary Arrangement or IVA is a legally binding repayment agreement over usually five years, overseen by an Insolvency Practitioner.
Under the agreement, the borrower repays as much of their unsecured debt as possible over an agreed amount of time – they may also have to contribute any extra money they receive, as well as freeing up any equity in their home.
In return, creditors agree to freeze interest and charges on any debt and will write off any unsecured debt that the borrower can’t repay by the end of the agreed period, as long as the IVA has worked out as expected.
Bankruptcy is a court-led procedure that can begin with a debt of only £750. Someone applying for their own bankruptcy would need to pay court fees as well as an application fee. During bankruptcy, a borrower is expected to make financial contributions from their income if they can afford it, and may have to sell assets to repay as much of their unsecured debt as possible.
It usually takes 12 months to become discharged from bankruptcy, but other financial restrictions can apply for longer – up to 15 years in some cases. Once the bankrupt becomes discharged, any unsecured debts that they couldn’t repay are written off.
A Debt Relief Order or DRO is only available for people with up to £15,000 debt, with assets totalling £300 or less (not including clothes, tools of their trade and a car up to the value of £1,000). DRO applicants must also have limited incomes – less than £50 surplus income a month once they’ve paid for all their household and personal expenses. Homeowners cannot apply for a DRO.
A DRO is an alternative to bankruptcy and allows the borrower to write off unsecured debts that they cannot afford after 12 months.
Note that all three forms of insolvency will have a serious impact on an individual’s credit rating for six years.