Insolvencies in the UK: bankruptcies, IVAs & DROs
On Friday 6th November, The Insolvency Service will release the insolvency statistics for the third quarter of 2009.
The statistics will show how many people were made insolvent in the third quarter of the year (how many people were declared bankrupt, how many people entered an IVA (Individual Voluntary Arrangement), and how many people entered a DRO (Debt Relief Order)).
The figures for the third quarter are highly anticipated, given the state of the nation’s economic health, and it will certainly be interesting to see how many insolvencies were recorded during that period.
Insolvency statistics from Q2 2009
In the previous quarter, there were 33,073 individual insolvencies in England and Wales – a 27.4% rise from the same period in 2008.
Those insolvencies were made up of 18,870 bankruptcies (15.3% higher than in the same quarter in 2008), 12,225 IVAs (27.4% higher than in the same quarter in 2008) and 1,978 Debt Relief Orders (only just introduced).
New form of insolvency – DRO
Bankruptcies and IVAs are the two ‘long-standing’ forms of insolvency, but on 6th April 2009, a third form of insolvency came into force – the Debt Relief Order (DRO).
Debt Relief Orders, which were introduced by The Tribunals, Courts and Enforcement Act 2007, offer an alternative route into personal insolvency for people struggling with unmanageable debt. They are designed for people who live in England and Wales who don’t own their own home, have little disposable income (no more than £50 a month), don’t own assets worth over £300 in total (other than a car which must be worth £1,000 or less) and have less than £15,000 of debt.
A Debt Relief Order places a ‘moratorium period’ on the debts included in it. It usually lasts for one year, and during that time, creditors involved in the Order can’t take legal action to recover their money without receiving permission from the court. DROs are run by The Insolvency Service in partnership with trained debt advisers called ‘approved intermediaries’.
At the end of the 12 months, providing their circumstances haven’t changed significantly, the individual will have their debts written off.
What’s next?
The recession has being going on for a year and a half, and many experts believed it would have come to an end by now.
However, figures released by the ONS (Office for National Statistics) on Friday 23rd October revealed that the economy had shrunk by a further 0.4% in the third quarter of 2009.
And even when the recession is over, there tends to be a gap between ‘economic bad news’ and people being declared insolvent. So we may still see an increase in the number of people entering IVAs – people whose income has dropped as a result of the recession, for example.
But what is an IVA?
You can find more information on IVAs here. It is described as a legally binding agreement between a borrower and their unsecured creditors in which they repay as much of their debt as they can afford over an agreed period of time, after which their creditors will write off the outstanding unsecured debt.
According to the website, IVAs usually last for a period of 5 years, and cannot go ahead without the approval of voting creditors who account for at least 75% of the individual’s unsecured debt.
As with other forms of insolvency, an IVA has its advantages and disadvantages. Here are a just a few:
Advantages
- When someone enters an IVA, they will begin making reduced payments, based on what they can afford once their ‘essential costs’ (mortgage/rent, bills, food costs, etc.) have been covered.
- When an IVA comes to an end (normally after 5 years), any remaining unsecured debt will be written off and the individual will be debt-free – as far as their unsecured debts are concerned (an IVA cannot write off mortgage debt, for example).
Disadvantages
- If the individual cannot keep up with their payments throughout the IVA, the IVA may fail and they may even end up being made bankrupt (although their IP will, if possible, try to negotiate with their creditors, asking them to accept a few changes to the terms of the IVA, rather than letting it fail).
- If the person is a homeowner, they may be required to release some of the equity in their home during the final year of the IVA – which will also go towards repaying their debts.
