Insolvency and its types

Insolvency is defined by law as the state of inability of a company or an organization to pay off the debts to its creditors. It is of high importance to know the various insolvency methods and types involved as the single decision can create life-changing results. The types of insolvency include formal and informal agreements, negotiation and extension and sometime even legal write-offs. The below is a comprehensive list of the various types of insolvency that you can choose upon with careful consideration.

Bankruptcy – This is the most common solution people tend to resort to when faced with the inability to repay debts. Though insolvency deals more with company and partnerships, bankruptcy is individual oriented. The filing of a bankruptcy petition in the court initiates the process and is normally over a period of 12 months with certain exceptions towards early discharges. Though this type of insolvency method provides a complete write-off of debts by end of the bankruptcy term and enables an easy restart, it has its negative implications towards future credits.

Informal Arrangement – This is also known as the family arrangement and is one east method for resolving debt solutions. This method includes meetings and appointments with single or all creditors and discussion over negotiations regarding the terms of the debt. You can also take in the help of an insolvency practitioner to guide through these meetings and discussions. The main disadvantage of this method is that there is no legal agreement over these negotiations and any decisions made can be withdrawn or modified without notice.

Individual Voluntary Arrangement or IVA – This is a legalised version of establishing negotiations as discussed in the previous method of informal arrangements. The terms and payment mode are accepted by the creditor based on financial status of the individual in debt to suit both their interests. This method deals with asset and payment options in a better way than bankruptcy. In this method also you can look out for an insolvency practitioner to guide you through the process and legal procedures.

Compulsory Winding-up – This is a legal, through-the-court order that follows submission of winding-up petition in the court by your creditor. The debtor must have owed the creditor at least a minimum of £750 for him to file a bankruptcy petition against him in the court. The creditor also needs to issue a 21 day statutory demand for payment on the money, on failure of which he can take matters to court. Once declared in the court, the official receiver takes up the control and manages the cash and assets and other dealings with the creditors. The liquidator takes control of all assets of the bankrupt person to settle the money needed for the creditors. He will also possess ancillary powers for running the debtor’s business without the administration resources.

Corporate Voluntary Arrangement or CVA – This is very similar to the IVA where a compromise is reached between the company and its creditors with the exception that a 75% vote for the compromise is required to pass it and also that the resulting compromise binds all the creditors of the company. This procedure is supervised by an insolvency practitioner though not controlled by him.

Debt Relief Order or DRO – This is one another option that suit individuals with a less amount of debt. This is a legal binding but does not require the court proceedings and is made among the debtor, creditor and insolvency service agents. It is suitable for individuals who do not possess any house or assets that can be sold on liquidation purpose. The DRO is issued for a period of 12 months by the insolvency service order and is an ideal way to protect the company or an individual for the creditors during this period. By end of the Debt Relief Order term, the individuals, financial status is again analysed and in case of inability to pay off the debts, they are written off. The major feature of this scheme is the DRO restriction on the debt amount to be less than £15000 and the restriction of informing any new creditor in case of debt greater than £500.

Administration – This is a procedure that has been included to provide protection for the company from its creditor’s acquisitions or winding-up petitions. In this method, an insolvency practitioner takes care of the insolvent company’s business and this provides ample time for the business to restructure itself. The time provided also helps in establishing negotiations with the creditors for reduction in payment or for extension of terms. In worst case, it provides sufficient time to sell the business for a profitable amount so as to deal with all of the debts. Once the IP takes charge, the directors lose the power over their company and this is one major disadvantage of this method.

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