What do I do? Where do I start?

Broad comparison of the above options

Financial problems take over every aspect of your life and those of your family. 

There are probably a range of thoughts  and feelings coursing through your mind: you may feel ashamed, you could feel foolish that you let things escalate this far, you may feel that in comparison to your peers you are doing badly; you are uncertain what the future will hold; you probably feel you have let your family down; you want to do what is right for your family, for you and for your creditors but are find it hard to find the right balance as nothing you do will satisfy everybody; mentally, emotionally and physically you are drained; you are sick and tired of all the struggles, the creditor pressure and uncertainty; you want to sleep at night; you want a simple life back even if it means having less money, but you are not sure how to achieve that; you have not been in this position before so do not know enough about your options, the processes or what you will be going through; you are afraid and want it all to go away.  It is not surprising you are having problems making a decision.

If this is how you feel, take some time out to read my various blogs.  I have written them to help you find the right course for you.  What you choose to do is up to you, but please draw opon my 20 years’ experience in insolvency. 

By reading these blogs you will see that what you eventually do depends on two things: firstly what your personal circumstances give you the opportunity of doing, and, secondly, what you choose to do.  That is to say, you have a choice, or at least you do if you have not come across my ramblings too late in the day.  The choice that you make will depend on what you want to achieve.  If you want certainty and speed, you will take one route.  If you want to avoid bankruptcy, you will take another. 

Look ahead to what you want to achieve, having that ‘dream’ will help you get through the hard times that you may have ahead of you in the short to medium term.  There is a future, and it is bright, but I understand that you may not be able to see that far yet.  Trust me, it will happen.  Even if you have left things far too late and really now only have one option, that of bankruptcy, my  blogs nevertheless will help you too, they will guide you through this tough time.

And do not forget, you are not the only one in country with these problems.  About 100,000 people a year are going into IVA or Bankruptcy.  Many more are literally lousing up their lives and those of their families by going into Debt Management Plans.  Debt is one of the largest problems that this country has.  You are not alone.  And I do not see people in Tescos wearing sackcloth and ashes.  Neither should you.    

Now, let’s move on from the emotional side of it all, and go on to the factual side.   

If you have financial problems, you have 5 main options, if you include doing nothing!  The other 4, which I recommend in terms of they are much better than sitting on your hands, are:

1)      Paying your debts in full over time through a Debt Management Plan.

2)      Having a relative settle your debts for you: this may involve the creditors writing off some of their debt.

3)      An Individual Voluntary Arrangement (An ‘IVA’)

4)      Bankruptcy  

As a first step click on the link ‘Broad comparison of the above options’: it will take you to a schedule comparing each of the options listed above. 

Then read each of my separate blogs in detail, these will set out how each process works, and who they suit and do not suit.  Feel free to print them off and read them over a good bottle of red wine, in a darkened room, without the kids around.  Once you have read them, then either e-mail me, or go to see a professional for further advice.  Whatever you do, the repercussions will reverberate around you and your family for years to come, so make it happen! 

  

Should I go bankrupt? – tips and pointers

Bankruptcy is often the solution of last resort, but recent changes in the law have made it more often than not the most appropriate route for ordinary people, resulting in something like 70,000people in the UK likely to petition for their own bankruptcy in 2007.  

 My personal view is that bankruptcy should be the ‘default option’ for people with severe financial problems, and that people should only take alternative routes if n doing so they:

1)  Protect their assets; or

2)  Protect their income. 

Bankruptcy is far easier a process, with fewer implications, than it used to be.  Many IVA factories fail to tell you the real truth behind bankruptcy, they use salesmen to sell you he wrong solution, from which they make money.  Their driving force in doing so is greed.  Such commercial organisations have come under severe criticism in recent years, from all sides, for promoting the wrong solution.  Such factories are themselves now going to the wall, leaving hundreds of debtors exactly where they started off at the beginning of the IVA, having wasted time, money and effort. Do not blindly ‘take the easy way out’ of an IVA, instead take time to assess the bankruptcy option.    
 

If, after considering the alternatives, you decide that you have no realistic alternative for clearing your debts or indeed if you want to simplify your life and clear your debts quickly, you can petition for your own bankruptcy at your local county court. The cost for such a ‘debtor’s petition’ is about £500 including court fees and Official Receiver’s fees, but, people on means tested benefits often pay far less (you should ask the court). For an additional fee an Insolvency Practitioner or experienced insolvency lawyer can help you fill in the petition, but most people find that this is unnecessary as the forms are relatively simple, so save your cash if you can! You can also fill out the forms on the internet via the Insolvency Service website. 

Someone called the Official Receiver will be responsible for managing your bankruptcy.   The OR is a civil servant.  They have posted several brochures to their website, which they say are there to help people.  But my advice is not to make decisions based solely on what you read there as I have to say that I find the brochures written in quite an unfriendly, cold, and uninformative way.      

Your creditors can petition for your bankruptcy, but in practice credit card and unsecured personal loan companies choose not to do so, preferring to employ their own internal or external debt collectors to increase the pressure on you to increase your payments to them.  Alternatively they sell their debt at a discount to companies that buy ‘under-performing’ debt, with those companies then hassling you even more for cash.  This way they avoid the £1,000 or so cost of making you bankrupt.  I often find that in practice, if you do not make yourself bankrupt, then no one else will.  So it is in your hands.  But the longer time passes, the more you continue downward in an seemingly never ending spiral of debt and increasing creditor and cash pressure.

Making yourself bankrupt through a debtor’s bankruptcy petition is like a visit to the doctor’s: something you dread but is not so bad in reality.  Indeed you will find that you may never see the District Judge (especially if you complete the petition fully and note on it that you have taken an Insolvency Practitioner’s advice) as he is often very busy: making you bankrupt is often, at least for him, just a rubber stamping exercise!  And bankruptcy comes as a welcome relief, you can tell your creditors not to contact you any more, and if you approach it properly and constructively, it provides the first step to rebuilding your and your family’s finances and a new life.       

The main disadvantages of Bankruptcy include stigma (but this is mostly in your own mind – and you can control this- but frankly who cares less what the mothers at the school gate think, as in a week or so it will be yesterday’s ‘chip paper’); possible job loss (although this is very rare as it generally only happens to professionals such as lawyers, accountants, and senior management); the loss through sale of assets (which could, but does not always have to, include your home, and anyway most people have sold virtually everything anyway to try to stave off bankruptcy); income reduction (this again applies to the ‘professionals’ and some self employed rather than ordinary, employed, working people – the OR will not contact your employer to tell him of your bankruptcy); and a credit rating that cannot be repaired for a minimum of 6 years (your credit rating is probably shot anyway and will remain so whatever route you take – indeed bankruptcy is probably one of the quickest routes to geting a good credit rating back!). Bankruptcy is a realistic solution where the advantages of bankruptcy outweigh the disadvantages or where those disadvantages are of no consequence (the motto of ‘if you haven’t got it, they can’t take it, can they?’ applies), as is the case for more than the vast majority of ordinary people, hence why so many people now chose bankruptcy.  In reality for the vast majority of ordinary people the ‘disadvantages’ are few and merely ‘temporary inconveniences’ which are worthwhile undergoing for the greater long term benefits. 

Most people who declare themselves bankrupt have few or no assets that the Official Receiver could seize and sell.  There are restrictions on what the Official Receiver can seize and sell.  He cannot seize personal possessions such as wedding and engagement rings; nor normal household furniture; nor normal clothing; nor the tools of the bankrupt’s trade; nor a vehicle worth under £2,500 to enable the bankrupt to work or to travel around (say if disabled); nor most pension entitlements; nor anything owned by any other family members (individuals go bankrupt, not the family). Indeed in the vast majority of cases, he can take nothing! Nor will he come round your house.

However, if you do have assets that are not so ‘excluded’, then these assets will be realised by the Official Receiver.

There several common misunderstandings as regards your home.  Most people assume that if you are made bankrupt and you own your own home, you will lose it.  This is simply not so. You should read very carefully my guidance in a separate post on my blog, and take professional advice on your own particular circumstances. 

If there are no assets to realise in your bankruptcy the Official Receiver will retain the conduct of your case.  If there is a reasonable level of assets that can be realised (say over £20,000), the conduct of your case could  be handed out to a Licensed Insolvency Practitioner who is appointed as your ‘Trustee in Bankruptcy’. His role is virtually identical to that of the Official Receiver, and he has all the powers afforded to the Official Receiver.  Your duties to him are the same as those owed to the Official Receiver, namely to assist him do his work. Apart from helping the OR and trustee when asked (say on realising assets), attending on them if asked in for an interview, supplying paperwork on your historic finances, you do little more: the OR/trustee takes full control of the bankruptcy on his own.  Bankruptcy is not onerous on you in terms of your time commitment – you really can start your life afresh!
  

Depending on your earnings post bankruptcy, you may be required to make contributions to your creditors out of your income. The amount that you pay is determined by the amount that you can reasonably afford after the normal living costs typically incurred by a person in your position.  The amount allowed for living costs may be lower than your actual costs where you have been accustomed to an ‘excessive lifestyle’: the Official Receiver uses a mixtture of actual costs (e.g mortgage, rent, council tax) and ‘guideline living costs’ set out in a government survey called the Family Expenditure Survey for those other costs he believes you should be incurring: Bu if you can prove to him that you have unusual circumstances, such as if you have a medical condition or have to travel large distances to work, he should  allow an increase on these fairly low base costs.  

But at the moment the Official Receiver is taking an unrealistic view of some of the costs of living: but just because he is who he is does not mean that you should agree with his figures: you should challenge them if you think he is being unreasonable: provided that you are being reasonable, you have nothing to lose by having the court re-assess those figures, the court will err on the side of the ’small man’.  Judges on £100k a year will not look favourably on the OR trying to push a bankrupt into an IPA where the monthly contributions are a mere few hundred pounds: the Judge’s time is precious.   This is called an Income Payments Agreement or Income Payments Order ( an ‘IPA’ or ‘IPO’) and it will remain in force for 3 years from the date of the agreement/order. This means that even though you may have been discharged from your Bankruptcy after 6 months to 1 year, you will still have to continue paying your IPO for a further 2 + years.

You are free of your debts on your ‘Discharge’ from bankruptcy.  Provided you assist the OR you will be automatically discharged from bankruptcy just 12 months after the start of your bankruptcy.  You could be discharged as early as 6 months if the Official Receiver is satisfied over your conduct both pre- and post- bankruptcy and decides not to investigate further.  Many consumer debt related bankrupts are now obtaining their discharge at 6 months.   Notwithstanding your duties to do so, it is worthwhile helping the Official Receiver throughout the bankruptcy as this will hasten your discharge, and avoid a ‘Bankruptcy Restriction Order’ (see below).  Although discharge times have been reduced by recent legislation there is a sting in the tale…… your conduct immediately before going bankrupt could go against you. If you are found to have been dishonest or reckless, or failed to comply with your duties to the Official Receiver, he can apply for a ‘Bankruptcy Restriction Order’ or agree a ‘Bankruptcy Restriction Undertaking’ with you , which has the effect of extending  the restrictions imposed on you by your Bankruptcy by 2 to 15 years depending on the severity of your actions. Misconduct prior to 1 April 2004 will, however, not be taken into account. Any Bankruptcy Restriction Order/Undertaking will be registered on the Insolvency Service website. There used to be separate discharge times that applied to people who were in a second Bankruptcy but this is now irrelevant, unless this is your second Bankruptcy in 15 years.

Even after your discharge it could be difficult, or if you do it will be more expensive, to get unsecured credit. Your credit records will show your Bankruptcy for 6 years. However, credit reference agencies may well keep it on record for a lot longer even though it should be removed from their records at the same time. All lenders check these records when they are considering an application for credit, a loan or mortgage.   But nowadays there are more and more  mortgage companies willing to give secured loans to former bankrupts at interest rates virtually no different from Jo Public.  After all, they are secured against a property, and property values do tend to go up over time.

If you have been unfortunate enough to have had a Bankruptcy petition filed against you in error then you should seek professional advice as soon as possible. Or if you have been made bankrupt recently, but should not have been so, all may not be lost as you may still be able to have the Bankruptcy ‘annulled’ or you could still put in place an Individual Voluntary Arrangement (see my separate post on IVAs). Take early professional advice from an IP.

 The advantages of Bankruptcy are :

• Bankruptcy is a speedy, conclusive and inexpensive way to ‘lose your debts’. 
• It provides a platform on which you can subsequently rebuild your finances and indeed, your life.
• If you follow the debtor’s petition route, you can hasten going into bankruptcy.  Creditors cannot stop you going Bankrupt.
• Your debts (with the exception of student loans, fines and CSA payments and certain other family split related debts) are ‘written off’ when you are discharged at between just 6 to 12 months.  Compare this with an income based IVA, typically 5 years, and a DMP, many of which I see for upwards of 5 years.
• All contact from creditors during and after the bankruptcy should be with the Official Receiver: you should receive no more debt collection letters or calls as soon as you are made bankrupt (if you do, you should just tell the OR to sort out the creditor concened).
• You are forced to live your life differently after bankruptcy as you will find it difficult (but not impossible) to obtain credit: you may not believe it now, but his really is not a bad thing.  You will enjoy life far more. 
• Bankruptcy does necessarily mean you will lose your home.  See my separate post.
• Your finances are ‘standalone’, you are a separate person in the eyes of the law from your family : your relatives will not come under any pressure as they would with DMPs or IVAs to contribute towards your living costs or debts.  Don’t forget, you can go bankrupt, your other half does not have to do so: she/he will have her own choices and what she/he does will depend on an assessment of her/his own financial circumstances.  What you chose to do may be very different from what your other half choses to do: this gives you, as a family unit, options.   

The disadvantages of Bankruptcy include: 

• Until you are discharged you cannot:
  • Act as a company director
  • If you are an accountant, lawyer, barrister, soldier, policeman or other professional for whom avoiding bankruptcy is essential, you could lose your job and thus suffer a significant reduction in your income, from which you may never recover.   Interestingly, the law was changed a few year ago to enable MPs to go bankrupt without losing their position!  Wonder why they voted that in?   
• Your debt problems may not remain confidential between you and your creditors.  Your name will be ‘published’ in the Government’s register of Bankrupts, which is available on the internet, and in the public notices section of the local newspaper, and in the Stubbs Gazette, a publication used by credit rating agencies .  Your Bankruptcy will stop on the credit files of various credit rating agencies for 6 years.  Your employer cannot be told directly, but he may find out about your bankruptcy where you get a ‘nil tax code’ – bankruptcy is one of very few reasons for getting a nil tax code.
• If you have ‘surplus income’ (because you are no longer making any debt repayments) you could be made subject to an IPA/IPO for 3 years.  However, the amount of the IPO is typically 50% to 70% of your net disposable income after paying essential living costs: this is almost always less than you would be required to pay into a DMP or IVA and for much shorter a period. If you have no ‘surplus income’, there is no IPA/IPO: the OR cannot get blood out of a  stone!  
• Your credit rating will remain poor for at least 6 years post discharge.  It is illegal, while bankrupt, for you to incur any form of credit above £500 without first telling the lender you are bankrupt.
• Your finances come under scrutiny by The Official Receiver.  Certain transactions, particularly where you may have given away assets for no value or sold them for less than they are worth, or paid some creditor ‘preferentially’, could be upset, particularly if those transactions are in favour of a ‘connected party’ – typically your family.  The Official Receiver will review your finances going back up to 5 years, searching for such transactions, although most of his focus will be on the last 6 months before bankruptcy.    
• Some people find the court process and interview by the Official Receiver daunting.  In practice 99% of people find these things much easier than they envisaged beforehand.  But it is still a worry.
• If, for any reason, you do not assist your Official Receiver in fulfilling his duties, you could be made subject to a BRO/BRU, effectively extending the period of your bankruptcy.  So help him!  But helping him does not mean that you have to agree with him all the time. 
• You will experience a few inconveniences, including:
  • You will probably have to change banks as the top 4 banks will not operate accounts for bankrupts.  Your standing order and direct debit arrangements will have to be changed.  Go to Nationwide or CoOp: they will operate accounts for bankrupts.
  • You will have to make some unpaid time available to go to court to present the debtor’s petition, to complete various forms required by the Official Receiver, to be interviewed by the Official Receiver (although in practice this is often just a telephone interview), and to answer any further questions the Official Receiver has.   

Bankruptcy can be the right course for people:       

• Who have no assets or at least no assets that the Official Receiver can seize and sell. 
• Who have uncertain income levels, poor job security, a low level of disposable income, or are reliant on benefits. As a rough rule of thumb, in my view, if a four member family unit has an annual income of under £40,000 pa, Bankruptcy could be the best option for you (that is if you have no assets to protect) for sorting out your finances.
•  For whom the speed of losing their debt is important.  This is particularly so for people approaching retirement, they want time to save a little to be able to enjoy retirement; or for people whose children will want to go to university in the next 6 or so years, this way they can save to help them through uni without coming out with debts; or for people with a young family, why should the quality of your children’s childhood suffer because of your debt problems?     
• Who do not expect a windfall receipt, such as a legacy from a relative or significant profits from a developing business venture, before discharge.  If you are thinking of going bankrupt, your relatives should consider changing their wills to cut you out of your inheritance, say leaving it instead to your children.  Don’t forget, it is your relative’s choice to whom they leave their money: they are under no obligation to leave all they have worked so hard for to your creditors: they want to see it used for the benefit of the family, letting it fall into the hands of the OR by chance does not do that.  Once you have been discharged from bankrupty, they can change their wills back again: you keep windfalls post discharge.  This is not illegal, this is allowing your relatives to leave their money to who they want.     
• Are poorly disciplined in terms of budgeting.  Bankruptcy forces better budgeting, you have to deal only in cash.  If you haven’t got it, you cannot spend it, you can no longer rely on credit to support you in those bad weeks.
• Are close to retirement and have an occupational, as opposed to a personal, pension scheme.  Occupational pensions are not realised by the OR.  Some personal pension schemes are. Take professional advice.        
  
  Bankruptcy is normally not the right course for people who:
•       Who have signifiant assets that can be seized in a bankruptcy.
•        Whose income or career will be severely effected by Bankruptcy.

 I hope that you find this quick overview of use. Please let me have your comments.

Should I consider an IVA? – tips and pointers

IVAs are not the panacea that some claim they are for sorting out people’s finances.  Indeed they are, in my view, being massively ‘oversold’ as a solution to the financial problems of the normal man in the street.  The Insolvency Practitioners’ professional bodies say that an IVA is the right solution for just one in 20 people with financial difficulties.  This makes it unlikely that IVA is the best solution for you, after all you would think twice before putting a tenner on a twenty to one rank outsider at Aintree!  So read on for a summary of what an IVA is and who it suits and does not suit so that you can properly assess whether your horse has any chance of winning.  And as this is probably the most important decision you will take in your life and there are no each way bets, take your time to really assess your options.        

Firstly you need to understand what an IVA is. 

An IVA is a formal insolvency procedure whereby monies are paid into a fund managed by a Licensed Insolvency Practitioner, which he then pays out to your creditors.  It is nothing more than a piggy bank managed within a few insolvency rules and the agreement you reach with your creditors.  But unlike DMPs (where creditors are paid in full) in the vast majority of IVAs creditors write off part of their debt, provided that you complete your half of the bargain. That is to say, as long as you do what you agreed you would do at the outset (in something called a ’Proposal’), at the end of the IVA when a certificate of completion is issued by the IP, any unpaid debts are ‘written off’.  Your creditors can no longer pursue you.  But if you do not complete the IVA properly, you will have wasted an awful lot of time, money and effort and there is every chance that you will be made bankrupt anyway as creditors normally insist that the IP makes you bankrupt if the IVA fails.   

The vast majority of IVAs are ‘income based’, centred around one, hopefully consistently affordable, monthly payment, over 5 years.  I know that it is stating the obvious but an awful lot can, and often does happen, in someone’s life in 5 years.  If your life is already ever-changing or you expect it will change massively in those 5 years (such as if you want to have children, or your children will need support at uni, you are to retire, or you are in an unstable job as the sector is changing massively), you probably should not go into a 5 year income IVA all things being equal.  Do not just consider just your existing circumstances when contemplating going into an IVA: think forward as to what will or could happen.   

The monthly income payment into the IVA is calculated by producing an ‘Income & Expenditure Account’, in which is set out all of your income as well as your ‘reasonable living costs’.  What are reasonable living costs depends on your circumstances, and can be massively different from even your next door neighbour.  Your creditors will compare the costs you put in your I&E to the ‘Family Expenditure Survey’ used in bankruptcies to set Income Payment Agreements and Income Payment Orders.  They do this to try to find areas of apparent overspend, which they will try to mop up by increasing the monthly payment they require to ‘pass the IVA’.  However, unlike IPAs and IPOs in bankruptcies, creditors in IVAs are asking for your entire surplus income to be paid into the IVA.  Compare this to bankrupties where the Official Receiver only looks for 50 to 70% of your surplus income (and then over just three years).  Thus, there is a big difference between the hard cash that you pay out in an IVA compared to that in a bankruptcy.With creditors insisting on the entire surplus income, an IVA will leave you with little margin for error or changing family or work circumstances.  As creditors do not take too kindly to attempts to change the IVA once it is put in place, you have to be absolutely convinced that you will be able to pay in that surplus income every month, come rain or shine.  That is a big ask, and will wear you down over such a long period.   Truly ask yorself, are you and your family committed, truly committed, to making this work.  Because if it doesn’t (typically there is a ‘three missed payments and you are out’ provision in the Proposal), the IVA will fail and you will probably be made bankrupt.  
As an IVA is an agrement with your creditors, the attitude of the majority of your creditors is important.  You cannot force an IVA on the creditors as you can ‘force’ a bankruptcy on them.  As with all agreements, there is some give and take. This leads us on to the attitude of finance creditors such as the banks, and credit card and unsecured loan companies with you and in dealin with proposed IVAs.  People are often surprised to see just how much the creditors relationshp with them changes as a result of their financial problems.  Before your problems, you were a customer from whom the bank could reap a handsome profit and because of this the bank would work hard on building and maintaining a long term relationship.  Once you have severe financial problems you become more of a number, you are no longer a person.  The banks terminate the ‘we want your business’ type of relationship, to them you have become a short term profit maximisation opportunity, an opportunity to minimise their write off and maximise their profits.  Do not expect them to adopt an attitude that helps or cares for you or your family, their relationship with you is no longer a fair and balanced one, they have gone into ‘debt recovery mode’.  Your creditors will see your IVA in a completely different light to the way you do.  In looking to maximise their financial return, they want to see the IVA truly hurt you.  They will not vote for the IVA if they perceive it as the easy option for you.  But increasing the level of payments to make it hurt also increases the likelihood of the IVA failing, there is a balance to be sought by the Insolvency Practitioner but more often than not as your negotiating position is quite weak, the balance is often in the banks’ favour.  If the IVA is declined they may lose a few thousand pounds, a mere drop in the ocean when you consider the size of the profits they are making.  To you their turning down your proposed IVA really hurts, it effects your entire family.  Some specific credit card companies, particularly those who literally threw money at you beforehand are really quite tough in their demands, the income that you may ultimately be forced to pay into the IVA will depend on the relative size of those credit card companies’ debts: in essence they take advantage of the requisite majorities needed (see below) to take what I believe is often an unreasonable stance.  This may change when the current spat between lenders and the IVA factories falls away, but at this moment in time, you can expect an IVA to be a more expensive solution than it was historically it may have been for someone in your circumstances and it is certainly more expensive than bankruptcy (if you have no assets to protect).  Going forward the creditors’ attitude may change to IVAs.  Or it may not, who knows?  So consider the timing of any IVA: deferring it for a few months whle the industry sorts itself out may be a good idea.  The most important thing to remember about your creditors is that they are looking for just two things:  they want certain cash (not maybe’s) and they want it as soon as they can.  Remember this in formulating your Proposal, because if you are not satisfying both of these essentials, you will not get the IVA through. 

What is clear is that you can expect a bumpy ride putting the IVA in place, it is not and has never the plain sailing that some IVA provider factories make out it is.  So you need to assess the likely attitude of the major credit card companies before you try to go into an IVA, there is absolutely no point in putting an IVA together which although reasonable will still be turned down by the most aggressive credit card companies: tell your IP the identity of the credit card companies, he should know how difficult each of them could be at this particular time.  And if he doesn’t, then don’t use that IP. 

Your intentions for dealing with your debts are included in a document called an IVA ‘Proposal’.  This document, which is normally prepared by a Licensed Insolvency Practitioner (‘IP’), is a rather lengthy document setting out your entire financial circumstances, showing previously undisclosed facts to your creditors, and comparing what will happen if you are made bankrupt to what you are proposing in the IVA.  Once the creditors have this document, they know all about you and your financial circumstances, warts and all.  And you have to be entirely truthful in it: it is illegal to omit things or tell half truths to encourage your creditors into agreeing an IVA.  Once the document is out with your creditors, there is no going back in terms of disclosure, they have it all.  If the IVA is turned down, the creditors will use that information against you. 

The Proposal is presented at a creditors’ meeting for them to vote on.  They can either accept it as it is, reject it in its entirety, or propose ‘modifications’ (see below).  You may be required to be present at the meeting, but normally you will only have to be physically present in ‘non-consumer’ IVAs or where you have a trading business. The IP chairs that meetng and will control it.  Well before the meeting is called a draft copy of your Proposal is sent to you for your approval. It is at this point that any alterations are made, the IP will have mae some mistakes in the draft, it is impossible to get it all right, and he may not have the balance entirely right. This document is the most important financial doucument that you will sign in your life.  Give it the time it deserves. It is absolutely essential that you are not only entirely happy with the document but also that you fully understand it.  It is particularly important that you check that the standard IVA Proposals that come off the IVA factories’ production lines reflect your personal circumstances and what is important to you: such documents cannot possibly cater for everyone’s circumstances. If you do not understand it fully and feel entirely comfortable with it, don’t go into IVA.
 
Once you have approved the draft Proposal, it is finalised by the IP who adds a report of his own to it and takes it to the local county court to be registered. In cases where legal action against you is well advanced you can be protected by an ‘interim order’ granted by the court, but this is done at the IP’s discretion. In most cases, you will not need an interim order.  Once the court has given its ok to the calling of the meeting of creditors, the IP sends a copy of the Proposal to each creditor giving them notice as to the time and the place of the creditors’ meeting. As I have said, the IP chairs this meeting, acting as an ‘honest broker’ between you and the creditors, ensuring that the Proposal is both realistic and fair to you and the creditrors.  He is like the referee in a boxing match, ensuring that you both play by the Queensbury Rules.  In the case of a consumer debt related IVA it is highly unusual for any creditors or their representatives to attend the creditors’ meeting in person: they want to avoid the cost of attending.  Instead, creditors vote by fax or by post in the day(s) or hours leading up to the meeting.  This means that in most cases in the time between the sending out of the Proposal and the creditors’ meeting the IP (who is that that time called the ‘Nominee’) has to provide additional information to the creditors on your income, assets and debts and discuss with them, and agree subject to your approval, ‘modifications’ to your original Proposal. 
Such discussions with your creditors are taking up more and more of IPs’ time nowadays (for which the IP will want paying), as creditors each often look for something different from the other and some are adopting quite an aggressive approach nowadays: the IP has to obtain a reasonable consensus, one that is agreeable to both the creditors and you.  Increasingly the IP has to adjourn the creditors’ meeting, often several times, while further discussions are held with creditors: his job is not helped by the fact that many bank, credit card and finance creditors are represented by other IPs or lawyers who deal with proxies/voting on behalf of their clients on a ‘just in time’ basis, meaning that discussions are compacted into the hours immediately before the meeting. You may be given very little time indeed to consider whether you should be accepting creditors’ modifications: you probably need to talk these over face to face with the IP, given their importance on your life and the lives of your family.  Most IPs charge extra for every adjournment forced on them: it is reasonable for them to do so as they have several other duties that they have to fulfil as a result of adjourning the meeting.    
        
At the meeting, creditors can either vote to accept or reject your Proposals as you originally set them out with the IP, or to seek the ‘modifications’ referred to above.   Modifications can only be made with your consent.  If 75% (in value terms) of those that have voted agree to accept the Proposals (with or without modifications) then the IVA is agreed and becomes legally binding on all your unsecured creditors whether they voted or not. The effect of this is that, any creditor who chooses not to vote at the creditors’ meeting is bound by the decision of those who do.   An IVA can be a useful, but expensive, tool for tying difficult creditors into a workable solution agreed by the majority of the creditors.
 
The voting rules at such meetings are a little more complicated where ‘associates’ (broadly, your family) are owed monies, you should consult the IP concerned. If creditors turn down your Proposal, as you will have fully explained your financial circumstances to them, there is every chance that one or more of your creditors will really turn up the heat on you, sending in debt collection agents, serving ccjs or even making you bankrupt. They do this to put themselves higher up the payout line, to try to maximise what they claw in from you.  When an IVA is accepted the IP’s role becomes that of ‘Supervisor’ of your IVA, monitoring its progress and ensuring that the terms and conditions that were agreed at the creditors’ meeting are properly adhered to. It is your responsibility to pay the agreed payments to the IP who will then ensure that these payments are distributed to all creditors in accordance with Proposal.  It is in your own interest to maintain your payments as failure to pay will almost certainly result in the ‘failure’ of the IVA and you being made bankrupt.   You may have to pay sufficient funds into the IVA to make you bankrupt should it fail (this could be £1,000 to £1,500) prior to the creditors’ meeting as a condition the creditors agreeing to the IVA.  If you have difficulty making the agreed monthly payments in the IVA you should contact their Supervisor who may, if the agreed Proposal lets him (and not all Proposals prepared by IPs or modified by creditors do so – so ensure that yours does), be able to re-negotiate with creditors.Upon the successful completion of the IVA you will be ‘debt free’ even your debts have not been paid in full.  Any unpaid debts are effectively written off, your creditors cannot pursue you for the unpaid balance, and you are free to make a fresh financial start.It is worth noting that if you do enter into an IVA with your creditors and you have an endowment policy linked to your mortgage then you may be expected to cash it in and pay yoir share of the proceeds into the IVA, to be paid out to your creditors.  Similarly, if your property has a reasonable amount of equity then it is likely that you will be required to remortgage for the maximum possible sum straight after the acceptance of the IVA, paying the additional monies into the IVA.  If you have no, or limited equity, the creditors will probably ask you to remortgage in year 4 for the maximum possible sum, paying all the additional monies raised then into the IVA.  Thus, in this way, the IVA will effect you going forward for much longer than its 5 years.  Read my ramblings on homes in bankruptcy to compare the what happens there.  Drastic as these may sound the issue of a remortgage of the home can be a deciding factor in whether an IVA is approved by your creditors, and as they could possibly secure its sale in a bankruptcy, it could be the only way in which you could retain your home.  This is a complicated and important area, do not second guess what your options are, go to see a Licensed IP for advice. There is another type of IVA.  This is where a third party, such a wealthy relative, agrees to pay a relatively significant amount of money into the IVA in return for the creditors not pursuing you into bankruptcy.  In essence monies are paid into the IVA which the creditors would not otherwise receive in order that you can avoid bankruptcy.  The advantages of an IVA include:

• It is a very flexible type of arrangement: it can be in any form that you and your creditors should agree it to be.  But creditors do have a major say in its format and you cannot force something on them that does not make commercial sense.
• It is a formal arrangement which binds your creditors.  Provided that you comply with its terms, your creditors can take no further action against you personally.  All further contact from your creditors should be through your Supervisor, not you.  This can relieve you of the pressures of receiving debt chasing calls and letters.  
• An IVA commits you in the medium to long term to a life where cash will remain an issue: meeting that monthly payment will remain an issue for the foreseeable future: this will be very wearing on you and your family, it will effect every aspect of your and their lives.
• Provided you keep up with the payments and comply with your part of the deal, you avoid bankruptcy: for some people this is important.  For example, you avoid any stigma that you may associate with bankruptcy.  If that is the only argument for an IVA, you need to consider whether you should ditch your pride in order to protect your family from the rigours of a lengthy IVA: do not shirk this question.  Discuss this honestly and openly with your family, you owe to them not to prejudice the quality of their lives, life is far too short to do that. 
• The drawbacks of bankruptcy are avoided.  For example, while in an IVA you can continue acting as a company director and if you are an  accountant / lawyer / barrister / policeman, other professional or sole trader or partner for whom avoiding bankruptcy is essential to maintain your job and income, you can continue almost as normal, subject to anything to the contrary in any other legal agreements you may have signed.  But make sure that you check out what your company’s memo and arts say about a director going into IVA, if it contains some form of prohibition (as some do), if you go into IVA wihout changing the memo and arts to remove that provision, you would be acting ‘ultra vires’ by breaking it, and this makes you personally liable for the debts of the company that you incur!   
• The Proposal can enable you to settle your debts for less 100p in the £.  Any unpaid debt is written off provide that your IVA has been successfully completed.

The disadvantages of an IVA include: 

• Your debt problems do not remain entirely confidential between you and your creditors.  Your name will be ‘published’ in the Government’s register of IVAs, which is publicly available on the internet.  However, unlike bankruptcy, your name will not appear in the local newspaper .
• There is no guarantee that creditors will accept the IVA Proposal on offer.  They may ask for increased monthly payments, which may be unsustainable in the long term.  
• An IVA does not provide the speed with which you could otherwise deal with your debts in a bankruptcy.  Under current law, you could be discharged from bankruptcy within 6-12 months, some 4 years shorter than a typical IVA.
• Your credit rating will remains poor for the duration of the IVA and longer

  IVAs can be the right course for people:

·        For whom avoiding bankruptcy is important, for whatever reason

·        Who have the reassurance of reasonably certain income levels, good job security and a stable family life.

·        Are truly serious about committing themselves to paying out virtually all their net available income after meeting just their priority living expenses for the duration of the IVA.

·        Who can validly expect windfall income/receipts, such as a legacy from a relative, certain profits from a developing business venture, to eventually wipe out their debts.  However, if thre is any likelihood of a windfall in the next 5 years take proper advice from an IP: this is only a snapshot guidance.

·        Are disciplined enough to keep within their expense budget, avoiding further credit, either because their existing difficulties came about other than through excessive personal spending or they have since learnt to curb any such excesses.

·        Where they have a creditor, small in overall terms, but large enough to prevent a DMP, who is being difficult or obstructive.  Under an IVA it is possible for the other creditors to bind him into the arrangement (provided he is under 25% in value of the voting creditors), even if he objects to it.  Thus an IVA can be used to force a solution on creditors who are taking a non-commercial stance in their dealings with the debtor such as where they are being merely vindictive.            

IVAs are not the right course for people who:

·        Are not middle or upper earners, where the IVA is an income only arrangement.  As a rough rule of thumb, if the family unit does not have an annual income of over £40,000 pa, and an IVA does not protect either income or assets , you should probably not consider an IVA.

·        Are close to retirement.

·        Have no assets that can be seized in a bankruptcy or have no fear of bankruptcy.
·        For income only arrangements, have a young or growing family, the expense of which will eat into their ‘net free income’ over time.

         

Should I go into a Debt Management Plan? – Some tips and pointers

As with IVAs there is a great deal of misselling of this as solution to the financial problems of the normal man in the street. Often DMPs merely just put off the inevitable, yet they are very wearing on you and your family, they truly do mess up your lives.  Read on to see whether a DMP is right for you or whether you are just putting off the fateful day when you will be forced into a far bolder, quicker, and more clinical alternative.     

In a DMP creditors are paid in full over whatever length of time is necessary to do so. There is no debt foregiveness. A typical DMP should consolidate all of your unsecured debts into a single and, hopefully, more affordable and simpler monthly repayment which is then paid to creditors on a pro-rata basis over an agreed period of time. This payment is generally calculated by a trained debt consultant who, with your assistance, will review their current financial position before suggesting a figure to you and your creditors that will put you back in financial control. At least that is the theory. The monthly amount offered to creditors is determined by the amount that you can reasonably afford after your normal costs of living have been paid out.  This should ensure that you never gets into any arrears or miss paying any of your priority commitments such as your mortgage/rent, car finance, utility bills and council tax, etc.

A ‘debt management company’ contacts creditors on your behalf to make an offer. That offer will:

·        Set out the monthly amount that you are able to pay your creditors and over what period of time.

·        Explain to creditors your financial circumstances and highlight the advantages to them in accepting the offer being made.

·        Normally request that creditors agree to stop any further interest accruing on their outstanding debt and to stop any further charges, and ask them not to take any legal or any other action to recover the debt, providing you keep to the terms set out in the DMP.

Like all informal arrangements, creditors are not obliged to agree to the DMP but they are more likely to accept it once they are made properly aware of your true position and a third party is involved.Once agreed, the DMP is usually administered by the organisation who drafted it.  They collect the money from you, they pay it out to your creditors.

Once a DMP has been agreed by creditors, it is your responsibility to continue paying the agreed payments to the DMP administrator.. The administrator shoud then ensure that these payments are distributed promptly to all creditors on a pro-rata basis until the successful completion of the DMP.   It is in your own interest to maintain these payments as failure to pay could result in creditors cancelling their agreement and demanding repayment of their debts in full, possibly pursuing you to Bankruptcy. People’s circumstances change over time: if you experience difficulty in making the agreed payments you should contact the administrator of your DMP so that he can re-negotiate with creditors. In addition, the DMP will be regularly reviewed, typically on a 6 month or annual basis, normally to see whether you can pay more into it so that it can be completed quicker.  The review should also include the possibility of creditors accepting early settlement, should you unexpectedly come into some money.  

Once a DMP is completed you are ‘debt free’ and be able to make a fresh financial start.  There are many genuine companies offering professional debt management services and in most circumstances this process can be used very successfully. However, there are several possible problems that could arise and there are always a number of fringe operators who prey on the trusting public, offering a quick, pain-free, solution to their problems.   This is never the case, as a DMP, as with any other solution, does have its drawbacks and no solution is ever as simple or quick as some would make it out to be.  If, after reading these notes you feel that a DMP could be right for you, you should:

• Before formally engaging a debt management company, satisfy yourself that it will clear your debts in less than five years, otherwise you may be better off using a different solution, such as an Individual Voluntary Arrangement or Bankruptcy. You can work out how long your DMP will be by multiplying your debts by 17.5% and then dividing the result by the monthly amount you can afford to pay. This will give you the approximate number of months it will take to clear your debt, subject to your creditors agreeing to freeze interest and stop charges, and the administrator’s fees.  
  

• Avoid using fringe operators – look out for those operators employing untrained salesmen adopting hard sell techniques - use a fully licensed debt management company who adhere to the DTI’s debt management guidelines.  
  
• Establish any charges that you will have to pay for their services.  Some deduct their charges from the payments that you make into the DMP.  Some take the first three months’ payments you make into the DMP as their initial fee just to get the DMP off the ground.  A few, government or credit industry funded DMPs, provide you with a free service, paid for by grant aid.  Bear in mind that if you pay for the service, your DMP will last longer and it will cost you more because you are paying the fees.  Do not use DMPs who charge a significant upfront fee.
    
• Ask to see evidence that the creditors have agreed to freeze interest and charges.  You do not want a large, unpleasant, surprise later into or after the expected duration of the DMP.  Some DMP organisers ‘forget’ to ask the creditors to freeze interest, or if they do ask, they forget to get the creditors’ agreement in writing.  Make sure this does not happen to you, it will be you and not the DMP organiser that loses out.
  
• Once in a DMP, contact the debt management company at least every six months, to see what they have paid to creditors, what fees they have drawn, what cash they are holding.  If you are unhappy with the speed at which they are paying creditors or the level of their fees, take independent advice on your options.  Don’t be afraid to ask questions of the DMP organiser, if you are shy in doing so it is you who will lose out.  

 The advantages of a DMP include:

• Being an informal arrangement, your debt problems remain confidential between you, your debt management company and your creditors.  Unlike IVAs and bankruptcy, DMPs are ‘unpublished’.
   
• Provided you keep up with the payments, you will avoid IVA or Bankruptcy: for some people this can be important.  Some wish to avoid the stigma associated with IVA or bankruptcy.  Others try to avoid Bankruptcy in order to safeguard their career or their income.  Examples of people who typially prefer DMP to IVA or Bankruptcy  include franchisees, the police and armed forces, the ‘professional classes’ such as accountants, lawyers, and barristers, and other employees whose contract of employment, or sole traders who have a contract with a large customer that, provides for termination in the event of Bankruptcy or IVA.  If you are not one of these people, you should really think about the alternatives of Bankruptcy or IVA instead of DMP. 
  
• The personal restrictions of Bankruptcy are avoided.  For example, while in a DMP you can continue acting as a company director or as a partner in a trading business. 

The disadvantages of a DMP include: 

• There is no guarantee that creditors will accept the DMP on offer.  They may instead ask for monthly payments, the size of which may be unsustainable in the long term.  People’s circumstances change over time, if there is any uncertainty that you will be able to complete the DMP, then think hard and long about the alternatives before you waste your money in the DMP.   
  
• You, eventually, have to pay all your debts, and in full at least as far as the ‘capital element’.  Typical IVAs and Bankruptcies enable you to compromise your debts in full, persuading creditors to accept less than the full debt in settlement.  Thus a DMP can cost you an awful lot more in hard cash terms than the alternatives.  Ask yourself, should you really be spending that cash, which you could otherwise spend on building a better life for your family, on the DMP route.  You can spend your own money and live your own life as you wish, but do you not owe your family a moral obligation to do what is right for them even if it does mean you compromising on your own personal interests?  
  
• A DMP commits you to a way of life where cash will remain an issue for its whole duration: meeting that monthly payment will be uppermost in your mind and dictate almost every aspect of your home and family life throughout the DMP.  A DMP will still be very wearing on you and your family.  It is not the simple, quick and clinical solution to your financial problems the fee-paying DMP organisers make it out to be. 
  
• A DMP does not provide the degree of certainty and speed you may otherwise get in an IVA or in Bankruptcy.  Under current law, you could be discharged from Bankruptcy within 6-12 months.  A typical IVA is for 5 years.  Both are often much shorter than a typical DMP. In addition, people with debt problems often long for certainty, they have ben worn down by continual debt chasing letters/calls: the certainty that Bankruptcy or IVA can give can bring piece of mind.
     
• Your credit rating will be poor for the duration of the DMP, and for 6 years afterwards.  But for many people this is not a problem as either their credit rating is already beyond repair or they have no  interest in incurring further credit.  The irony is that Bankruptcy and IVA can repair your credit rating quicker, even though under those procedures creditors are not paid in full.
  
• People’s circumstances can change unexpectedly or very significantly over time.  Life experiences such as illness and losing your job may result in the DMP failing, and you being forced into IVA or bankruptcy any way, having ‘wasted’ valuable time and money on the DMP.
   

DMPs can be the right course for people:

•  For whom avoiding bankruptcy is important, for whatever reason.
  

• Who have only a small level of debt compared to their income which they can comfortably pay off over a maximum of 5 years.
  

• Who have the reassurance of reasonably certain income levels and job security
  

• Are truly serious about committing themselves to paying out virtually all their net available income after meeting just their priority living expenses for the duration of the DMP.
  

• Who can validly expect windfall income/receipts, such as a legacy from a relative, certain profits from a developing business venture, to eventually wipe out their debts.
  

• Are disciplined enough to keep within their expense budget, avoiding further credit.  
  
  DMPs are not the right course for people who:
  

• Are close to or go into retirement before its end.
  

• Have no assets that can be seized in a bankruptcy.
  

• Have a young or growing family, the expense of which will increase over time, making it more difficult to afford.
  

• Are on low levels of income, such as those on benefits, which provide little or no ‘surplus income’: bankruptcy is often the more appropriate course.

I own my home: what will happen to it in a bankruptcy?

What can or will happen with your home depends on whether there is equity in it.

Where there is no equity

If there is no equity in your home, say because you have re-mortgaged previously to repay unsecured debt, the Official Receiver will not remove you from your home: there is no ‘equity’ for him to realise.  This is because the Official Receiver’s role is to realise your ‘assets’: your home is not an asset if there is no value in it for him to realise. 

Other points to bear in mind are:

• You can stay in your home as long as you like if you continue to pay your secured creditors/mortgage.  The secured creditors cannot repossess your home just because you have been made bankrupt.  But they can if you do not pay the mortgage.  So, to stay in your home, where there is no equity, if that is your wish (and we would not always advise this as large mortgage payments can be a continuing cash problem and bankruptcy is your chance to start again by losing your debts), you should continue to pay your mortgage and include the payment in any income and payment account you send to the Official Receiver. 
• You will have to make alternative arrangements to ultimately repay your mortgage if you have an endowment policy, as this is an asset which the Official Receiver will realise on bankruptcy. 

• If you believe your mortgage repayments or an increase in the value of your home could mean there being some equity in it within three years of your bankruptcy, then you should buy the Official Receiver’s interest in your home soon after bankruptcy at a nominal sum: take professional advice on this before you go bankrupt. 
• If you chose to leave your home because there is negative equity or you cannot afford the mortgage payments, any shortfall your lenders may suffer will form a claim in the bankruptcy: they cannot ask you to pay it to them post bankruptcy: this is because bankruptcy helps you clear the decks from your debts, enabling you to make a fresh start.  However, if you need local authority accommodation after the sale, you should be careful how you ‘hand the property back’ as many councils have rules where by they do not have to offer you accommodation if you ‘make yourself homeless’: go to see the local authority and check their rules with them before you decide what, how and when you do what you do.           

   

Where there is equity

Where there is equity in your home the position is a little more complicated. 

The following points should be taken on board:

• The Official Receiver cannot remove you from your home without your consent in the first 12 months after bankruptcy.  But he can do so through a simple application to the court thereafter.  That is unless there are ‘absolute compelling reasons’ for him not to do so, such as where you have disabled dependents in the home and it has been extensively modified for their convenience. 
• Where the home is in joint names or you are married, typically your share of the equity will be 50% of the equity as a whole.  But it may not always be so.  The Official Receiver can realise only the bankrupt’s share of the equity, he cannot take the share of the equity of your partner if he / she is not bankrupt.
• The Official Receiver can either sell you or your partner your share of the equity (normally at a reasonable discount to reflect the speed and ease of the deal) – you may have to borrow this money from a relative as you will probably struggle to borrow it from a commercial lender – or repossessing and selling the property and sharing out the equity in the agreed proportions.
• In practice, if you have not already acquired his interest in the property, the  Official Receiver is likely to take steps to seize your home through a simple application to the courts immediately after the expiry of 12 months where there is a reasonable amount of equity: he is obliged to do so because it is his duty to realise your assets for the benefit of the creditors and typically the equity in your home is often the only or largest realisable asset that you have.  The likelihood of you succeeding in avoiding your home being seized is very slim indeed: do not assume that because you have stayed in your home for 12 months, you can continue to stay there indefinitely.  While the courts will be sympathetic, the law is very clear: the Official Receiver very much has the upper-hand: your creditors interests outweigh your and your family’s interests. 
• The Official Receiver can start the legal process to seize your home at any time between the first and third years after your bankruptcy: this means that unless you address the issue of what you want to do with your home soon after bankruptcy, you will have a continuing shadow hanging over your life.  Where there is equity, that shadow will not go away by ignoring it.
• After the third anniversary of your bankruptcy, he can no longer sell the home: the equity in it reverts to you. 

In practice where there is little equity in the home, the Official Receiver will consider accepting a nominal sum from you to sell the equity to you, rather than seizing and selling your home: consider making an offer to the Official Receiver for your equity as soon as possible post bankruptcy.  You should take professional advice on what you should offer.  And do not forget that you have to effectively pay both your and the Official Receiver’s legal costs in buying the equity.     

Phoenixes and personal liability for the new company’s debts

Two of the major underlying themes of the UK insolvency legislation are the promotion of an entrepreneurial spirit amongst the business community, where reasonable risk-taking is encouraged, and a ‘rescue culture’ enabling businesses to be recycled quickly and efficiently when things go wrong.

One of the ’safeguards’ on these themes has received more prominence recently, even though the law in this area is over 20 years old!  The part of the law receiving more attention is the ‘re-use of companies’ names’ whereby the business name or trade name (and this can even be a logo!) of an insolvent company is used going forward by a phoenix company.  To prevent the misuse of ‘phoenixism’, Sections 216 and 217 of the Insolvency Act 1986 provide that where a director (or ’shadow director’) of the old, failed, company is involved in a phoenix which uses the name used by the old company, he has to jump through several hoops to use the name with impunity.  If, for any reason, he does not go though all the hoops, he can be made personally liable for the debts of the new company should it too fail.  It is also a criminal offence which could open up the director to a fine, imprisonment or being disqualified as a director.  But by far the most damaging is the fact that mere technical breaches in procedure will mean the director becomes personal liable for its debts.  Some directors have already been made bankrupt and lost all they have worked so hard for as a consequence of technical breaches of the law, even though they tried to comply but failed to dot all the ‘i’s and cross all the ‘t’s or did not know of the existence of the relevant legislation! 

And this is not a hollow threat to directors as recently there have been several cases where major funders to the phoenix company have picked up on this.  Debt factoring companies and other banks certainly seem to have taken this on board, initiating action through the courts to make directors personally liable for company debts, including theirs.  So you can expect major creditors, such as the banks, the Revenue, and major trade suppliers to see this as an easy way of securing a recovery on their debt.  And often it is a real sucker punch, simple to prove, for which there is really no defence: either the procedures have been followed fully, or they have not, there is no middle ground for debate, the law is clear! 

The most common mistake that directors seem to have made before the advent of a new Insolvency Rule in July 2007 was to get themselves appointed to the board of the phoenix before they ‘get creditors’ approval’ to do so.  The law up to July 2007 required that directors give at least 21 days notice to the creditors of oldco of their intention to act as a director of the phoenix: but most of the time they had already set up the phoenix and appointed themselves as a director in readiness to complete an acquisition of the business from the Insolvency Practitioner.  This meant that the creditors had not been consulted properly under a strict interpretation of the law.  If you have breached the old law, you need to take legal advice on how to best protect yourself.  The sooner you do this the better.    

So how do you protect yourself now, under the new Rules?  

The good news is that it is a little, but only a little, easier.  You have to serve notice on the creditors and put an advertisement in the London Gazette of your intention to use a similar name, and this can be done before of after you have bought the assets from the Insolvency Practitioner, and before any liquidation of the company (so it can be done while the company is merely in Administration).  You can already be a director of the new company, but you should not have taken any actions as a director.   

My other tips are:

• Take advice from a Licensed Insolvency Practitioner or lawyer experienced in insolvency before you attempt to buy back the assets out of insolvency. 
• Do not try to shortcircuit the procedures, it cannot be done.  Consider the steps you need to take to comply with s216 when negotiating a deal with the IP and planning any continuation of trade. 
• Just because the old company is not in liquidation yet (for example, it may only be in Administration or Receivership) does not mean that s216 will not apply sometime down the line.  If it goes into insolvent liquidation later on, s216 will be triggered even if you have already bought the business and assets through the phoenix.  Think ahead, treat s216 as a threat now, regardless of the procedure the old company is to go into.  If the old company is in Administration or Receivership, re-consider the exit route from that procedure.  Could a CVA, which avoids s216 issues, be appropriate?: talk early to the IP about the exit route, and assess how achievable that route is.      
• If you have already breached s216, consider going to court to get its approval.  Or shut the phoenix company down, paying all the debts and opening up yet another new company, complying with the law this time around, either giving notice to the creditors of the old company of your intentions or going to court.  Another alternative could be to use a members’ voluntary liquidation or s110 Insolvency Act reconstruction procedure. Take advice on the most appropriate route for you.
• Do not ignore s216: it is a very real threat.  Spending money now to obtain good advice is a good investment, it will save you a great deal of cash and heartache later on down the line. 

Antecedent transactions: A twist on Transactions Defrauding Creditors?

Under the Insolvency Act 1986, where an individual or a company gives something away for less than its full value, the transaction can be upset, provided the deal occurred within certain timeframes of formal insolvency.  The aim of the law is to restore the position to what it would have been in an attempt to be fair to the creditors. 

But there is a hitherto less common way of an IP upsetting similar transactions, going back even further, which were always thought to be constrained to instances of downright fraud.  Under Section 423 of the Insolvency Act 1986 a ‘transaction defrauding  creditors’, where assets are purposely put beyond the reach of creditors, can be upset however far back it occurred.  It could have happened 20+ years previously.  And it could have happened at a time when the person or company was highly solvent!  The problem historically for IPs was that s423 carried a higher burden of proof, a criminal burden as opposed to a civil burden of proof, and that the IP had to prove that the intent had been to put the assets out of the creditors reach. 

The courts now appear to be interpretating how s423 works in a slightly wider way, making it easier for IPs to upset such transactions, meaning that more such deals could be upset.  If you or your company entered into something years ago that you thought was perectly safe, it may not now be so. 

This is a result of the recent Sands v Clitheroe case. 

In this case, Mr Clitheroe, a lawyer, gave his interest in his home to his wife 15 years before he went into bankruptcy.  At the time of the transfer he was solvent: the creditors who were owed money in the bankruptcy were owed nothing at the time of the gift (so we have to ask ourselves how the gift could have defrauded creditors who did not even exist at the time?).  He had a stable job, as a partner in a firm of lawyers, he was not contemplating going into any risky area of business. 
The court decided that it was the intent of Mr Clitheroe that was key in the case.  He had given his interest in his home to his wife in order to follow his firm’s policy that all partners should do this to protect their family should the firm be subject to, say, a large negligence claim.  There were no other reasons, such as tax reasons, for the transfer.  The court held that he had indeed knowingly put assets beyond the reach of his creditors, and ordered that Mrs Clitheroe transfer half of the equity in the home to the trustee in bankruptcy.

Hardly sounds fair to the wife does it? 

The case demonstrates a few things:

• If you are going to give something away, transfer out something for less than its true value, or transfer in something for more than its true value, you need to document all the reasons for the transaction.  The more reasons you have, the more likely you are to be able to defeat a trustee’s action to upset a deal under s423.  And keep those documents long after the normal limitations period.
• Consider taking formal advice from someone experienced in insolvency on any major gifts or transactions that could latterly be looked at in a different light, however solvent you may be.
• If you are contemplating transferring assets between yourself and your business or intra a group, do them at full value.  This will defeat any attempted Transaction Defrauding Creditors action.  Make sure the value at which the transfer is done is backed up by a formal valuation by the appropriate professional.  Ensure the basis of that valuation is reasonable given the then prevailing circumstances.  Document it fully with the expectation that someone 20 years down the line may look on it in a completely different light.   If, with hindsight, you seem to have insufficient documentation of a transction, prepare it now while it is all fresh in your mind.   
• Do not rely on your advisors to produce all the documents necessary to support the decisions made: many advisors have not yet taken on board the importance of the Sands v Clitheroe case and few will keep their records for 20+ years.  Make sure you keep the documents, put them in your loft and give copies to those loved ones who could potentially be effected by such an action! 
• Forethought is essential in any group planning exercise: shutting the door after the horse has bolted is unlikely to work. 
• If you are a professional who has  given advice to clients who may be effected by this, review the adequacy of, and retain, your records: you do not want to be attacked for having given erroneous advice: after all this case is a clarification of the pre-existing law, not new law.   

I suspect that, going forward, we will see more actions taken by Insolvency Practitioners aimed at upsetting transactions they see as defrauding creditors, particularly in a group strategic planning situation.  In the meantime, individuals, companies and the professionals advising them need to be more attentive to such potential exposure.               

Debt and Insolvency Links

This is a list of links to site that you may find useful if you or your company has financial problems:

Blogs

http://insolvencyblog.com – this is the Blog of Chris Laughton, a partner in Mercer & Hole Chartered Accountants and editor of the R3 publication ‘Recovery’.  Chris’ site summarises the key technical issues touching personal and corporate insolvencies today.  The Blog is written more for the insolvency professional than the man in the street, and contains the finer points of the law.   Insolvency procedures involving foreign issues are one of Chris’ fortes.

Insolvency Practitioners’ governing bodies

http://www.r3.org.uk/ – this is the site of R3, an association of accountants, lawyers, bankers, and other professionals who work in and around insolvency. At the publications links page.http://www.r3.org.uk/publications/?p=75 it will direct you to several useful publications that help guide people with financial problems, including ‘Is an IVA right for me?’ – everyone contemplating an IVA must read this; an overview of the different types of formal insolvency procedure and the technical words used; guides to people and businesses having financial problems; guides to creditors involved in formal insolvency proceedings; various surveys undertaken by R3; links to Statements of Insolvency Practice (SIPs), which are the guidance notes given to IPs on best practice and how the law should be interpreted; and a directory of R3 members.  

http://www.icaew.co.uk/ – the Institute of Chartered Accountants in England & Wales, the major licensing authority for Insolvency Practitioners.  The site contains the SIPs; Technical Bulletins (more detail on how IPs should be implementing insolvency law); guidance on how to make a complaint against an IP, etc, etc.  You will need to be quite precise in you searching though, there is a lot of content.    

http://www.insolvency-practitioners.org.uk/ – this is the site of the Insolvency Practitioners’ Association, one of the bodies who license and control Insolvency Practitioners.  It offers less than the R3 site in terms of online publications, but does provide links to the SIPs, and hopefully soon will provide detail on how the Debt Resolution Forum, a newly set up forum for people heavily involved in IVAs, will improve standards in the set up and processing of IVAs.  

http://www.accaglobal.com/ – the site of the Association of Chartered Certified Accountants, another body that licences IPs.   

Government sites

http://www.companieshouse.gov.uk/  - Companies House web site: here you can search companies and their directors.  It also contains an overview of certain formal company insolvency procedures and the striking off mechanism.  You can also search for disqualified directors. 

http://www.dti.gov.uk/ – The general DTI site.

Other sites 

http://www.bbc.co.uk/ Our beloved Beeb, an institution us Brits can be truly proud of.

http://www.accountingweb.co.uk/ Information for accountants.

Specific Insolvency Practitioners’ sites

http://www.companyrescue.co.uk/intro.html – although the site of a competitor, I have to take my hat off and say that this site is very well written indeed.  A very good starting point for finding out about any form of insolvency procedure and your options.  I am glad they are so far away, in Berwick on Tweed!

http://www.mercerhole.co.uk/insolvency/ – the site of Mercer & Hole, the firm I work for.  A clean well written website of a century old firm which has won awards for the quality and presentation of its site.  

http://www.relief4debt.co.uk/cms/section/homepage.html – again, the website of the firm I work for.  This is the site of Relief4debt, the firm’s IVA service.  It contains a useful debt wizard that may help you cut through all your uncertainties over which option to choose. 

Help sites

http://www.debthelpuk.co.uk/forum/index.htm    This is the link to a free of charge online forum on which people can anonymously post details of their debt problems and receive help from people who have gone or are going through similar issues and several professional advisers.  A useful starting point for advice, but if your circumstances are complicated, it is not a replacement for face to face advice from an experienced professional: and many such professionals provide a free initial consultation (that is often all you need).  

http://www.cccs.co.uk/ – Consumer Credit Counselling Services, a charity funded by the credit industry that helps people with financial difficulties.  It helps them, for example, put in place free of charge Debt Management Plans.  But CCCS is extremely busy at the moment, so great is the need for its services.  Soon to roll out an IVA service.  In my personal view, probably the best free help agency.  
   

http://www.nationaldebtline.co.uk/ – a government funded largely telephone based help agency for people and small businesses with debt problems.  Contains some helpful guidance on how to deal with your debt problems outside of formal insolvency, budgeting, Debt Management Plans, ad an overview of some of the formal processes involved (in this latter case, beware as it is written in what I believe to be far too simplistic terms, the devil can lie in the detail of the individual circumstances, nevertheless a good pointer).     

http://www.citizensadvice.org.uk/ – the CAB site contains online ‘helicopter view’ guidance on debt issues and links to the individual CAB offices.  You may find their advice site http://www.adviceguide.org.uk/ of help.  However, you will find it impossible to get through to the local CAB by telephone and the provision of debt advice patchy between the individual offices: it is pot luck as to whether you find anyone trained enough to deal with anything more than the most simplistic of circumstances. 

Income Payments into bankruptcies in disarray

The Enterprise Act, brought in a few years ago, reduced the period of bankruptcy from three years to one, more often than not less than that.  Quid pro quo, the Official Receiver was given the ability to essentially force bankrupts to pay surplus income into the bankruptcy for three years.  The Insolvency Service’s own figures show that so few of the old Income Payments Orders were completed that the system had, to all intents and purposes, broken down.  The new IPA system followed since the introduction of the Enterprise Act is based on similar processes  as had failed dismally under the old rules, and anecdotal evidence suggests that it too is failing.

In March 2006, the Insolvency Service issued a report which said that less than one in four IPOs were completed successfully.  In addition, in 40%  of  cases, less than 25% of the due payments were actually paid.  Put another way, if this were a car production line, only one in every four cars would come off the end of the line complete, just less than half would come off as the chassis only, and the rest would sit somewhere inbetween!  

So, why did it happen and why is this still seems to be happening?  The Insolvency Service is silent on this point.  Critics are increasing saying that bankruptcy really is a soft touch nowadays, the DTI’s earlier claims that it would not be, are unfounded.

The problems could lie in the Official Receivers’ own systems, their training of staff, their huge workloads, or the figures they use to calculate the free income.  I suspect it is a combination.

Let’s look at where the OR gets his figures from for what a ’bankrupt’s reasonable domestic needs’ cost.  The figures come from the Office of National Statistics own production ‘the Family Expenditure Survey’.  The FES is an annual appraisal of what it costs to live in the UK today.  About 6,500 of us are tested (out of 60+ million!) and there are few checks to ensure the figures the people provide are sensible.  I may not be a mathematician, but I cannot see how such a small testing population with so few checks or balances can come up with reliable figures covering everyone’s particular  circumstances across different parts of the country.  And I know that Netto beand are cheap, but if you look at the detail of the figures, you have to wonder how anyone can possibly live so cheaply over time. 

A worrying thing is that creditors considering debtors’ IVA proposals use figures based on the FES to calculate how much they can afford to pay into the IVA every month: no wonder so many income based IVAs fail! 

But what else can the OR use in the absence of reliable figures?  I believe that some common sense would be a good start, supported by a recognition that the base figures they are using are unreliable and should be used as a guide only.

If you are in bankrupcy, and are being asked to sign an IPA that you consider unreasonable, my advice to you is not to sign up, but willingly go to court to ask the District Judge to assess its level.  But go armed with evidence of what it costs for you to live, take a book setting out all of your living costs over time, take the till receipts and bank statements.  Use the time you have until the hearing to pull together all this information.  A Judge on £10k per month will struggle to give you an IPO when you earn not much more than that in a year!              

Understanding the Official Receiver

The Official Receiver is now providing an insight into how he is likely to approach certain aspects of his work in dealing with the affairs of a bankrupt. 

If you go to the Official Receiver’s website at http://www.insolvency.gov.uk/ and click on the ‘Freedom of Information’ link on the right hand side of the page it will take you to a contents page.  Towards the bottom of that page are two links: ’Technical Manual’ and ‘Case Help Manual’.  Clicking on the former will take you to certain extracts of the OR’s internal manuals.  The latter link will take you to a more detailed commentary on the OR’s options on particular areas of his work. 

You will probably find those sections that relate to homes, Income Payment Agreements, Income Payment Orders, Antecedent Transactions and discharge from bankruptcy the most useful.