Your guide to resolving debts: insolvency

Last Modified 16th of February 2021

In the first edition of our debt solutions advice series, we looked at credit agreements. If this wasn’t a realistic way of becoming debt-free then you might be interested in finding out more about our second debt solutions option: insolvency.

Before we go any further, we must point out that insolvency should be considered seriously before any action is taken – it is not an easy option to clear debts and can have a serious impact on your long-term credit rating.

What is insolvency?

If you’ve got debts so great that you can’t afford to repay them, even if you handed over all the cash and assets you own, then you are insolvent. This is a technical term, though – you can’t actually declare insolvency. There are three ways in which you can reach a debt solutions arrangement if you are insolvent:

Bankruptcy – this is where the debt is basically written off because realistically you will never be able to repay it. In Scotland this process is known as Sequestration. Not all debts are released in this situation though; more information will be given you when you apply for bankruptcy.

Individual Voluntary Arrangement (IVA) – this is where all the debts are consolidated and you agree to make an affordable payment each month for a fixed term, normally around five years. At the end of this period the remaining debt is written off. In Scotland there is a similar system called a Trust Deed, which normally operates over a three year time span.

Debt Relief Order (DRO) – similar to bankruptcy, this is where people with relatively low debt and few assets or spare income have their debts written off. The Scottish equivalent is a LILA and is only available if you’re not a homeowner.

Should I declare insolvency?

As mentioned above, you must think very carefully before becoming insolvent. Although it will clear your debts or help you restructure nominal payments towards them, it will have a massive impact on your credit rating and could affect your ability to take out products such as credit cards and obtain mortgages in the future.

Generally speaking, insolvency is a last resort for people with crippling debt. It should only be considered after you’ve tried to make some form of repayment arrangement with your creditors and it still hasn’t solved your debt problem.

There are many financial advice organisations that offer free advice to people struggling with debt: Step Change or the Debt Advice Foundation are just two of the helpline services you can contact if you’re thinking about declaring insolvency.

How do I declare myself insolvent?

Becoming insolvent is something that you must do personally – a company cannot do it on your behalf unless it’s bankruptcy.

If you feel you must declare yourself insolvent, the best thing to do is to contact the Insolvency Service if you’re an English, Welsh or Northern Irish citizen or the Account in Bankruptcy if you’re a Scottish resident. They will offer advice on proceeding with bankruptcy, an IVA, DRO or equivalent process and provide you with forms to complete in order to apply. You will need to declare details of all your financial affairs and will have to stop using credit cards and bank or building society accounts immediately.

Be aware that you will be placed on the Individual Insolvency Register, which details all those in the UK that have declared themselves bankrupt or applied for debt relief during the past three months. It also details people still making payments for IVAs. This database is available to the public so can be searched by financial providers and other businesses.

In addition you will not be able to apply for more than £500 credit without telling the lender you have been declared bankrupt, and you cannot become director of a company or work on a self employed basis without permission from the court.

Anything else I should bear in mind?

We cannot stress highly enough the importance of contacting a specialist advice helpline before you apply for bankruptcy or another form of debt relief that is administered through the court. Because it has such serious ramifications, any form of insolvency should not be entered into lightly, and ultimately you may still have debts to pay even if the majority of the sums you owe have been written off.

However, as an absolute last resort, an insolvency arrangement is a way of releasing you from crushing debt problems and allowing you to make a fresh start.