Page last updated at 23:02 GMT, Tuesday, 21 October 2008 00:02 UK

Facing up to personal insolvency

Money Talk
By Alan Tomlinson
Licensed insolvency practitioner in England & Wales

Alan Tomlinson
Alan Tomlinson

It is often said that death, divorce and moving house are the three most stressful events in a person's life.

As a licensed insolvency practitioner with some 25 years experience in England and Wales, I can confidently say that serious financial difficulty should be up there too in terms of the stress generated.

All the more so at the moment when very few of us are moving home but lots of us are starting to encounter money problems.

So just what are the signs that you may be starting to struggle financially, who should you turn to if you are, and how do situations like this tend to be resolved?

Before we get stuck in I would like to say one thing: it rarely turns out to be as bad as you think it is, and debt problems do not automatically mean you lose your home.

Are you struggling?

The main signs that you may be starting to struggle financially are if you are:

  • falling behind with your mortgage
  • increasingly having to live off your credit card just to make ends meet
  • having to take credit from parties that you would not normally take credit from
  • borrowing money from family or friends to pay pressing creditors
  • borrowing from Peter to pay Paul.

Clearly, you should try to cut back on any unnecessary spending so that you can divert some income towards paying off your debts, or at the very least try to stop them getting bigger.

But if that is too difficult to achieve, or is unlikely to have much effect anyway, then you should seek professional advice from an insolvency practitioner.

What I always try to drive home is that the sooner you do this, the more options you will have for resolving the situation.

Burying your head in the sand only makes the situation worse.

What is an insolvency practitioner?

Technically speaking, an insolvency practitioner is a professionally qualified person who is licensed to advise and act in relation to an insolvent individual, partnership or company.

Most insolvency practitioners offer an initial consultation free of charge and without obligation

In plain English, and as far as you are concerned, it is someone who knows how to resolve the sometimes grim financial situations people find themselves in as quickly and as painlessly as possible.

Insolvency practitioners are not only licensed but are also required to have professional indemnity insurance, as well as specific insurance on a case-by-case basis.

In addition, they will be regulated by one of a number of bodies, for example the Institute of Chartered Accountants.

And believe it or not, we are human, too. A lot of people expect us to be stern, Dickensian characters dressed in dark suits and are pleasantly surprised when we speak the same language as they do and are actually warm and sympathetic.

The meeting

However dire you think your own situation is, an experienced insolvency practitioner will have seen it all many times before and you should not feel embarrassed or uncomfortable about telling them absolutely everything.

A pile of one pence pieces
Time to count your pennies

Indeed, without full disclosure the insolvency practitioner will not be able to offer you the best advice.

The insolvency practitioner will start by asking you a number of questions relating to your income and expenditure, assets and liabilities in order to get a clear picture of your particular circumstances.

You should therefore take along with you a list of all your assets and liabilities, as well as details of your, and your partner's, income and expenditure.

Having gained an insight into your situation, the insolvency practitioner will explain the different options available to you, the benefits and pitfalls of each, and will answer the many questions you will undoubtedly have.

As a result, you will become much better informed and be able to make a rational decision about how you wish to proceed.

The insolvency practitioner will also fully explain any costs associated with each option and what options there are if you have no funds or only limited funds available.

For example, some insolvency practitioners will agree to draw fees over time rather than be paid up-front.

But if you have no income or assets, it is more likely that bankruptcy will be the way forward.

Given that most insolvency practitioners offer an initial consultation free of charge and without obligation, there really is nothing to lose.

The IVA

Subject to your own personal circumstances, an insolvency practitioner may propose an Individual Voluntary Arrangement (IVA).

In many circumstances, you may be able to retain the ownership of your private residence

An IVA is a legally binding arrangement with your creditors that an insolvency practitioner will help to put together in order to give you the necessary breathing space to get your affairs back in order.

The creditors will be given an opportunity to examine what is being proposed and if they agree to it, they will effectively take a back seat while you take the steps necessary to implement the arrangement.

For example, the arrangement might be for you to pay a proportion of your future income into a fund over a period of time so that at the end of the agreed duration of the agreement creditors are paid more than they would have been had you been declared bankrupt at the outset.

Alternatively, the arrangement might be for a third party to introduce funds for the benefit of creditors so that they agree to accept a lower sum now than that which is due, but in full and final settlement.

In many circumstances, you may be able to retain the ownership of your private residence.

After the initial consultation, setting up an IVA may well cost about £1,500, and probably more if your affairs are complex.

Bankruptcy

If an IVA is not appropriate for you, then it may be that bankruptcy is the way forward, which will involve going to your local county court to start the process.

A bankruptcy usually lasts for 12 months but can be less in many circumstances, and often you can continue to work during it.

After the conclusion of the bankruptcy, you are "released" and can carry on rebuilding your life.

With bankruptcy, a professional person, known as a trustee, is appointed by the court to realise any assets you may have and to deal with your creditors.

The main asset most people possess is their house.

However, if a spouse and/or children are involved, a trustee cannot dispose of the house for at least 12 months, and often may have no interest in it at all.

It is a common misconception that going bankrupt means you automatically lose your house.

This is not the case and the outcome will depend on the value of the house, the outstanding mortgage, the level of any other interest in the property and the circumstances of the case generally.

It is also a common misconception that bankruptcy brings it with a social stigma. Thirty years ago, maybe. Today, not at all.

The opinions expressed are those of the author and are not held by the BBC unless specifically stated. The material is for general information only and does not constitute investment, tax, legal or other form of advice. You should not rely on this information to make (or refrain from making) any decisions. Always obtain independent, professional advice for your own particular situation.



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