Live Session 1 - Options for debtors and creditors Flashcards
What is personal insolvency. What is the criteria?
Inability to pay debts as they fall due - cash flow test.
Cash flow test is failed if a creditor owes more than £5,000 and the creditor issues a statutory demand which is neither complied with nor set aside.
Cash flow test also fails when an execution for judgment has been returned unsatisfied.
What are the considerations for deciding which personal insolvency procedure may be suitable
10 Considerations.
- Can the individual meet the repayment terms of the chosen option
- Does the option leave the individual free from some/ all debts when process is completed.
- What personal impact will be felt the individual - disabilities, obligations and stigma - i.e loss of professional license, directorship, overriding ability to earn income
- What is the tax treatment of assets sold during the procedure
- Is the option binding on creditors
- What fees will have to be paid and when
- What will be the effect on the individuals credit rating
- How will the option chosen effect individuals employment
- What is the duration of the procedure
- Will the individuals home be at risk
What types of options are available to individual debtors
There are formal/ statutory procedures and informal/ non statutory procedures.
What are the formal options available to debtors
- Administration Order (County Court Administration Order)
- Bankruptcy
- Debt Relief Order
- Individual Voluntary Arrangement
What are the informal options available to debtors
- Consolidate debts/ refinance
- Remortgage (need a house and equity to release)
- Informal arrangements with creditors
- Debt Management Plan
- Do Nothing
What is a County Court Administration Order
Court based procedure whereby debtor agrees to make regular payments to Court to pay towards what is owed.
What are the preconditions for a County Court Administration Order
- At least two creditors with debts less than £5,000.
2. One creditor must have obtained a court judgment against the debtor
What is the process to obtain a County Court Administration Order
Debtor can apply to Court for administration order to pay money into court in regular installments
What are the costs associated with County Court Administration Order
No specific fee, but Court retains 10% of monies paid in.
What happens when County Court Administration Order is granted
On application by debtor, court informs the creditors of administration order and creditors have 16 days to appeal.
Creditors may be asked to be left out of administration order and separate repayments will have to be made.
What is the duration of a County Court Administration Order
Can’t last for more than 5 years
What must a debtor have in order for a County Court Administration Order to be effective
Regular income from which to make payments into Court
What happens if debtor is unable to make payments required under County Court Administration Order
If payments are not kept up, order can be cancelled and debtor will be subject to same restrictions as someone who is bankrupt
What is the effect of the County Court Administration Order during the period it is in place
- No bankruptcy petition may be presented by qualifying creditors
- No other remedies for recovery of qualifying debts may be used
- Existing proceedings will be stayed
- No interest may be charged on debts
- Debtor must provide court with details of:
- Assets
- Earnings
- Income
- Outgoings - Debtor must inform the court of any anticipate asset disposals
What is bankruptcy
Formal legal process. Commenced by debtor online or by one or more of his creditors owed £5,000 or more.
Who are most bankruptcies commenced by
The debtor themself.
What are some advantages of bankruptcy
- Debtor benefits from automatic discharge - usually within maximum of 12 months
- Debt forgiveness - vast majority of debts (but not all) will not survive the bankruptcy
- Bankrupt will have no further contact with creditors - Dealt with by Trustee. Should be less stressful for debtor
- Creditors can’t take action unless debts are secures on home or other property of debtor
- It is binding on all creditors
- Final
Why may bankruptcy not be advisable to some debtors
- All assets vest in the Trustee so debtor loses control of assets, particularly main asset in the estate, the home.
- Disabilities, Obligations and stigma that go along with being declared bankrupt
- Bankrupt cannot act as company director unless court consents
- Potential liability for bankruptcy offenses
- Trustee looks at transfers at undervalue and preferences given by debtor
- Debtor will have poor credit rating after bankruptcy
- Cost of bankruptcy higher than other procedures - inc IVA
- If debtor has been irresponsible, reckless or dishonest, may be subject to bankruptcy restrictions order
- Income payment order - requirement to pay surplus income can last up to 3 years post discharge
- Some debts are not discharged
What is a debt relief order
“Mini Bankruptcy”. Aimed at assisting over indebted individuals with relatively few liabilities, little surplus income and few assets who are unable to access other forms of debt relief. It offers an alternative to bankruptcy at a reduced cost.
What is the eligibility criteria for a debt relief order
- Unable to pay debts
- Have total liabilities of less than £20,000
- Have assets of less than £1,000 (subject to exceptions)
- Have surplus income of less than £50/
- Be domiciled in England or Wales for at least the past 3 years.
- Not subject to any existing bankruptcy order, restrictions or IVA.
- Not had a Debt Relief Order in past 6 years.
- Where existing bankruptcy petition, court or creditor consent is required for Debt Relief Order.
What is excluded from assets in a debt relief order
- Household equipment - bedding, furniture, clothing
- Work tools, books, equipment required for debtors employment or business
- Car valued at less than £1,000
- Vehicle that has been modified to suit a disabled person who requires use of vehicles for daily activities.
How can a debt relief order be applied for
Application filed online to Official Receiver - an approved intermediary may assist with application.
What must be included in application for debt relief order
- List of debts at date of application - amount owed and to whom
- Fee - £90 payable to Official Receiver
- Details of any security granted by debtor
- Such other information regarding debtors affairs as may be prescribed.
What happens if applicant meets criteria for Debt Relief Order
Official Receiver may grant Debt Relief Order without involvement of Court
Official Receiver sends copy of order to applicant and lists individual on Individual Insolvency Register
How long is a debt relief order valid for
12 months
What is the effect of a Debt Relief Order
- Protected from enforcement action from creditors LISTED on application
- Legal proceedings are restricted
- Free from debt at end of period
- Obliged to co-operate with Official Receiver
- Expected to make arrangements to pay creditors should financial position change
- Debtor is subject to restrictions
What restrictions does a Debt Relief Order impose on debtor
- Debtor can’t obtain credit in excess of £500, jointly or individually without disclosing Debt Relief Order
- Can’t carry on business, directly or indirectly, in different name from that included on application for Debt Relief Order without disclosing the DRO to those they are doing business with.
- Be involved, directly or indirectly, with promotion, management or formation of a limited company and may not act as company director without leave of Court
- Apply for a DRO more than once every 6 years
What debts are not included in a Debt Relief Order
- Criminal fine, penalties, confiscation order
- TV license arrears
- Child support and maintenance
- Fraudulent debts
- Student loans
- Claims for personal injury/ damages.
What happens at end of debt relief order
Remaining debts listed on application are written off
What is a Debt Relief Restrictions Order. When should it be applied? What is the effect
Official Receiver will have the power to apply for a Debt Relief Restrictions Order. It can extend the period of the Debt Relief Order for up to 15 years. It is applied when debtor can be shown to have been dishonest, irresponsible or reckless.
What is the purpose of an Individual Voluntary Arrangement
To enable debtors to obtain relief from their debts outside of bankruptcy. It allows the insolvent debtor to secure a moratorium on his debts.
What are some advantages of an IVA
- Avoids bankruptcy and associated disabilities, obligations and stigma
- Assets do not vest in supervisor - debtor retains control
- Certain assets can be excluded from arrangement
- Avoid threat of prosecution for retrospective bankruptcy offenses and prevents the making of a bankruptcy restrictions order
- It is binding on all creditors, even those who dissent, so long as 75% + of creditors by value approve.
- Lower cost option than bankruptcy so realisations an returns to creditors should be higher
- No automatic discharge & more chance of debtor keeping job increases the likelihood of better returns to creditors
- Opportunity to apply for interim order which creates a moratorium to stay proceedings when setting up IVA.
What are some disadvantages of an IVA
- Debtor has to pay proposed nominees costs and court fees
- If IVA is not approved, high probability that creditors will petition for bankruptcy
- Debtor needs 75% of creditors by value to approve terms of arrangement
- Continues longer than bankruptcy - up to 5 years.
- IVA’s have a high risk of failure, which typically results in eventual bankruptcy of debtor
- IVA supervisor, unlike a trustee in bankruptcy, is not able to pursue antecedent transactions.
What is a debt consolidation/ debt reorganisation
Debtor applies for loan to reorganise or clear debts. The result is that the debtor then only makes one monthly payment or loan, rather than payments to multiple creditors.
What is the main consideration when assessing whether debt consolidation is an appropriate option
Does the debtor have good enough credit to obtain the loan and do they have income from which to make the repayments.
Should also make sure that the new repayments are lower than the repayments before the loan.
What else should be consider when looking at debt consolidation
- Duration of loan
- What interest will be paid
- Early payment penalties/ charges for existing debts
- Terms of loan - security given
What are some advantages of consolidating debts
- May be able to get a good deal and convert high interest rate debts to lower rates
- Simplifies administration - paying one creditor rather than several each month
- Makes repayments more manageable
- Private arrangement
- May be cheaper than other forms of credit
What are some disadvantages of consolidating debts
- Longer term - extending payments results in paying more interest
- Full repayment will be required, no debt forgiveness
- May be exit fees from existing debts
- May securitise unsecured debt
What is required in order to remortage
The debtor must be a homeowner and have equity in the property.
What are some advantages of remortgaging
- Significantly lower interest rates
- Simple, regular payments
- Makes payments more manageable
- No disabilities, obligations or stigma
- Private arrangement
What are some disadvantages of remortgaging
- Securitises unsecured debt
- Risk losing house if fail to keep up with payments
- Will result in paying much more interest over period of mortgage
- No debt forgiveness
- There may be set up costs, mortgage arrangement fees
- Exit costs on original mortgage and early exit penalties on other debts
What are the features of an informal arrangement with creditors
It is a negotiated agreement with creditors. The debtor contacts creditors and attempts to negotiate an agreement to repay all/ some of their debts.
It is most appropriate when the debtor has a small number of creditors and the creditors are supportive of the debtor.
What are some advantages of an informal arrangement with creditors
- No need for 3rd party involvement - low cost option
- Creditor may be willing to forgive some of the debts
- No involvement of court necessary
- Flexible.
- None of the disabilities, obligations or stigma that accompany other procedures.
What are some disadvantages of an informal arrangement with creditors
- Creditors cannot be forced to agree to a compromise
- Creditor may consent but is at liberty to change their mind - should seek legal advice to ensure that an agreement is legally binding - increases costs.
- Success of approach largely depends on debtors ability to negotiate with creditors
- Debtor usually remains liable to repay full amount of debt
- May take long time to clear debts and interest may continue to accrue.
- Incumbent on debtor to arrange - stressful on debtor as they are dealing with the creditors.
What are the features of a debt management plan
A debt management company will assess the debtors financial situation to establish an affordable monthly repayment amount.
Debt management company then contacts all of the debtors creditors to negotiate a reduced monthly repayment.
Debtor pays debt management company and the debt management company in turn pays creditors a pro-rata amount.
It is a popular real world strategy
What must an individual or debt management company be
Licensed and regulated under consumer credit law.
How will a debt management company draw their fees
- Some will take payment out of amounts paid in for creditors.
- Some will require payment of initial fee for preparing, negotiating and administering plan.
What are some advantages of debt management plan
- Less stress for debtor - debt management company deal with creditors
- Interest on debt will usually be frozen
- Creditor may be inclined to consider a plan from responsible debt management company.
What are some disadvantages of debt management plan
- Creditors can’t be forced to accept proposed plan
- Creditors retain enforcement rights for other actions
- Usually no debt forgiveness
- Assessment of debtors’ finances shall usually be done on a more regular basis than in an IVA
What protection is there for consumers in a debt management plan
- Adverts can’t be misleading
- Fees can’t be charged up front, need to be spread out over 6 months.
- Debt management plan company must give debtor statements every 6 months showing progress under the plan and a 10 year financial projections.
What options are available to creditors who are owed money
- Compromise the debt
- Sue and obtain judgment
- Support a voluntary arrangement
- Petition for bankruptcy
What are the aspects involved in compromising a debt
If debtor can’t afford to pay, this may be option, although note it can be difficult to establish an accurate position of the debtors finances without court involvement.
What should the creditor be aware of
If a compromise can be achieved they should seek legal advice to ensure that terms are valid and properly recorded.
Creditor should also be aware that compromise could be challenged as a preference if bankruptcy follows.
What are the main aspects of petitioning for bankruptcy
Considered the “nuclear deterrent” - the threat of bankruptcy may be sufficient to generate improved/ full payment. If so, cheap and effective strategy.
Once a petition has been issued other creditors may support it which increases the odds of bankruptcy.
What is the main advantage and main disadvantage of suing a creditor and obtaining judgment
Main advantage: Indicates to a debtor that you are serious about recovery of debt and will put liability and quantum beyond doubt.
Main disadvantage: Court proceedings can be costly and even if judgment obtained, recovery will only be possible if debtor has means to pay.
When might a creditor be willing to support an IVA
Creditors who are concerned with return will support and IVA if it appears to offer a better return than would be achieved in a bankruptcy.
Creditor will have to be satisfied that proposal is feasible and that all assets available in a bankruptcy would be available in the arrangement
What should creditors considering supporting an IVA be aware of
Creditors should consider the integrity of the debtor and consider whether they are capable of adhering to terms of the proposal.
Creditors should also be aware that an IVA supervisor only has power to review transactions at undervalue and preferences. Trustee has full powers to investigate debtors conduct.
