Personal insolvency is the umbrella term for any circumstance where an individual has insufficient money available to make their loan payments when they fall due. It’s a precarious position to find oneself in but has become increasingly common over recent years, with over 135,000 individual insolvencies in England and Wales during 2010 alone.
Insolvency is not the same as bankruptcy. Although insolvency may lead to bankruptcy, there are usually alternatives available to those who find themselves insolvent. These include Administration Orders, Individual Voluntary Arrangements, and Debt Relief Orders.
If you’re facing insolvency, it’s important to seek advice at the earliest opportunity. It’s also important to pursue the most appropriate resolution before your creditors take matters into their own hands and a solution is imposed upon you. Insolvency Practitioners are authorized to provide impartial advice on the courses of action available to you about formal insolvency procedures.
How do people become insolvent?
Becoming insolvent ‘overnight’ is rare but not unheard of – household income might drop dramatically due to a lost job, reduced benefits or an unusually large bill might stretch the budget to breaking point. More often than not, insolvency creeps up over a much longer period with expenditure consistently exceeding income. In this scenario, the problem is frequently compounded by the borrower’s refusal to acknowledge their spiraling debt.
Five tips for avoiding insolvency
There are some simple steps you can take to protect yourself against the dangers of insolvency:
1. Know your figures – the first step to taking financial control is knowing how much money is coming in and how much is going out each month. Keep a close eye on how much money you are borrowing, particularly if your debts are spread across several lenders.
2. Budget accordingly – does your income exceed your expenditure? If not, take immediate action. Look for opportunities to cut discretionary spending, or consider working extra hours. If you can’t figure out how to balance your income and expenditure, seek advice.
3. Anticipate financial obligations – you know that your energy bills will increase in the winter months. You know when the car’s MOT is due. You also know that a family Christmas is expensive so don’t let these additional costs surprise you.
4. Put a little extra money aside – despite planning, some financial hurdles may remain unforeseen. Having a rainy-day fund will help cushion the blow.
5. Avoid taking further credit – paying due debts by taking further credit may be the only option to avoid insolvency but it will also increase your liability. Because of this, it should be considered a last resort. If you’re borrowing to repay debts, you’re already in a vulnerable position financially and should seek expert advice.
Avoid insolvency; Act Now!
If you are worried about the possibility of becoming insolvent or debts in general, the single biggest danger is inaction. Confronting the situation early on will minimize the fallout and lead to a faster and less painful resolution. Several organizations offer debt advice and can help you with your individual requirements. So find some help if you need it and prevent insolvency.