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The Potential Pitfalls of Personal Insolvency and How to Avoid Them

Why is personal insolvency such an important issue?

We have focused in recent months on (hopefully!) providing useful hints and tips in respect of corporate entities facing insolvency – but what about individuals?

Personal insolvency can have far reaching consequences, not least because it can involve the forced sale of the family home.

Bankruptcy, discharge and its effect

Contrary to popular belief, bankruptcy is less draconian than in times gone by and it can be the most appropriate solution, particularly where an individual has little or no assets. As many of you will probably be aware, since the introduction of the 2002 Enterprise Act, a bankrupt is automatically discharged from bankruptcy after only one year unless a court order has been obtained suspending said discharge.

However (again contrary to popular belief), discharge DOES NOT MEAN that the bankrupt’s assets will not be sold for the benefit of creditors – any assets will continue to vest in the Official Receiver or Trustee in Bankruptcy IRRESPECTIVE of discharge, which only releases the former bankrupt from certain other restrictions.

What happens to the family home in bankruptcy?

There is also a common misconception that the family home cannot be touched – this is certainly not the case. In most cases, the sale of the family home can be postponed for at least a year following the bankruptcy order – however, once this time period has elapsed, the requirement for creditors to be paid will usually take precedence and the sale of the home will be forced unless a refinance, buy-out or voluntary sale is arranged.

Conclusion – individual voluntary arrangement as an alternative

One of our IPs dealt with a case sometime ago where he proposed an Individual Voluntary Arrangement (IVA) in order to extract an individual from bankruptcy. The individual had a joint share in a valuable matrimonial home and was facing repossession by the Trustee in Bankruptcy. The IVA resulted in all creditors being paid in full (plus interest) and, very importantly, avoided the sale of the family home via a refinance.

Where an individual has significant assets and/or income, proposing an IVA to emerge from bankruptcy (or indeed avoid it completely) can be extremely beneficial as the costs of bankruptcy are usually very substantially more than the costs of an IVA. An IVA can also offer greater flexibility in dealing with debt. If you have any clients who may be facing financial difficulty in their personal capacity, please do not hesitate to get in touch with one of us.

David Perkins

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