Insolvency Solutions for Debtors with Only Benefits Income
A debtor must be insolvent before he or she can offer an Individual Voluntary Arrangement (IVA) to creditors. Furthermore the debtor must be able to make contributions to the IVA in part repayment of debts to creditors and be able to pay the administrative costs of the arrangement. Such contributions may consist of a lump sum, as for example the proceeds from the sale of a property or equity released via a re-mortgage or funds provided by a family member. More usually however, debtors make contributions into the IVA from their disposable income. An IVA may also consist of a combination of a lump sum payment with regular monthly contributions from income.
Disposable income is the money you have left over when you have paid all reasonable living costs both for yourself and for any dependants you may have. The amount of Disposable Income you have will depend entirely on your circumstances. Your income may come from a single source or from a variety of sources and may for example be comprised of your take home pay from your employment, benefits, pensions, tax credits, dividends, child allowances, lodger rental and so on. Reasonable living expenses will for example include the cost of mortgage or rent, council tax, utilities such as water, gas and electricity, food, housekeeping, telephone and mobile, TV & internet, life insurance, house insurance, vehicle running costs (HP, fuel, parking, car insurance, road tax, repairs and servicing), clothing and footwear, optical dental and medical expenses, as well as all the normal costs incurred in supporting your family.Insolvency is not confined to people who are in employment. People whose income is comprised entirely of benefits may find themselves to be insolvent and unable to pay their debts as they fall due.
If insolvent, such a person is perfectly entitled under the law to enter into an IVA. Provided that there is a reasonable level of Disposable income available, creditors cannot implement a blanket policy of excluding such debtors from exercising their legal rights to avail of the IVA solution if they are to avoid being accused of treating customers unfairly. Each IVA proposal has to be considered on its own merits. In fact, creditors have considerably softened their stance in recent years and have adopted a more inclusive attitude towards debtors whose income is benefits based. A reasonable yardstick being used is that the debtor’s Disposable income be at least £200 per month. If the benefits are means tested then it may be difficult for the debtor to have this amount of Disposable income available. If the benefits are not means tested then there is a greater likelihood that the Disposable income will reach at least this level.
Creditors do have the right to reject any IVA proposal and may exercise that right particularly if the level of debts is high and the estimated dividend is low. However, creditors are well aware that in the event that the insolvent debtor petitions for bankruptcy, they would generally expect to receive a much lower dividend. Indeed, in many bankruptcy cases creditors receive no dividend at all. From their perspective, half a loaf is better than no bread. To find out about all of your options, including bankruptcy, IVA, Debt Relief Order or a debt management plan, you should contact a reputable Insolvency Practitioner for advice or go to your local CAB or CCCS office or one of the other debt advice bodies which are funded by either the government or by creditors.
If an insolvent debtor’s Disposable income is really low the Debt Relief Order solution may be available. A Debt Relief Order is similar to bankruptcy in so far as it affords relief to a debtor who is insolvent but who has little or no disposable income and few if any assets. The relief of a Debt Relief Order is currently available in England and Wales, and although the legislation differs somewhat, a similar remedy is also available in Northern Ireland and Scotland.
A Debt Relief Order differs from bankruptcy in some crucial respects. The debtor must have debts of less than £15,000; disposable income must be less than £50 per month and assets must be less than £300. Initially the value of a pension fund was included as an asset but the legislation has been amended to allow this asset to be excluded from the calculations of a debtor’s assets. In addition, the debtor may be allowed to retain a vehicle with a value somewhat higher than £300 provided it is necessary for travelling to and from work or is essential for family transport.
When the Debt Relief Order is granted, the debtor is no longer responsible for paying their unsecured debts. Creditors can no longer pursue them for payment and they normally have nothing to pay towards reducing their debts. The Debt Relief Order lasts for one year and at the end of that time, all debts are discharged leaving the debtor debt free. The main negative effect of being subject to a Debt Relief Order is that the debtor’s credit worthiness is compromised for a period of six years and the Debt Relief Order will make it difficult to obtain credit until the debtor’s credit file is cleared, due to the defaults recorded therein.