© grant thornton international. all rights reserved. choosing the appropriate option for personal...

© Grant Thornton International. All rights reserved.

11 10 18 Bank IVA and DRO screenshow.pptx

Choosing the appropriate option for Personal Insolvency


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


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


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


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


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


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


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


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’


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


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


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


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



• 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



• Re-mortgage subject to following terms– age (at retired age no re-mortgage expected)– affordability– multiples of earnings– market conditions– credit check



• 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


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


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


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


Choosing the appropriate option

Contact

Jane LodgeManager

M 07966 495690E [email protected]


Thank you for your attention

Any questions?

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Documents

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year slide

occupation rights

suffering slide

priority slide

trade credit slide

cash assets slide

bankruptcy repayment