The legal tab provides more information about the type of insolvency a member may be going through, or have been through during the last six years.
Insolvencies are also known as debt remedies. They are legal processes by which a debtor's debts are written off.
For most lenders an insolvency is the most negative piece of information found on a applicant's credit file. As a result, a debtor who has gone through insolvency will have a very low credit score. They will find it hard to obtain credit for at least seven years (the length of time an insolvency is typically retained on the file).
Conversely, because all the debts have been written off, a credit union may take the view that the debtor has had the opportunity for a fresh start, with no other debts present. A relationship breakdown, ill health or loss of a job may have been the reasons for the problem, circumstances which are unlikely to repeat themselves.
According to research body, R3, the main reason that males become insolvent is a loss of job including the failure of their business. Women are more likely to go bankrupt because of a relationship breakdown. Men account for 60% of all insolvencies.
When considering lending to someone who has been discharged from insolvency it is important to consider whether any of the factors that led to the declaration still exist, such as a propensity to overspend or high cost of living.
Remember: if the applicant is still going through a form of insolvency there is likely to be a restriction on their ability to borrow.
Each form of insolvency is slightly different. The ones listed below apply to England and Wales and not Scotland:
Only 200 Administration Orders are made each year.
An Order costs 10% of the repayments made.
An Administration Order enables a debtor to repay an agreed percentage in the £ back to their creditors typically for three years. A debtor must have a County Court Judgment that remains unpaid and at least one other debt. The total value of all debts must be under £5,000.
With just over 4,200 orders made in Q1, 2018 bankruptcies made up 15% of all insolvencies.
Bankruptcy costs £680 in fees. It usually lasts for one year and the debtor is unlikely to repay anything to their creditors if the disposable income is less than £150 per month.
A bankrupt is likely to lose all their non-work-related assets, including their home. Business owners may be disqualified from being a director and some professions do not allow a discharged bankrupt from taking office. The bankruptcy is made public.
Just over 6,500 DROs were made in Q1, 2018, representing one quarter of all insolvencies.
A DRO is a form of low income, low assets insolvency. It costs £90, lasts 12 months. No repayments are made towards the qualifying debts which must be under £20,000 (some debts, such as rent payments and student loans do no ‘qualify’ towards the limit and are not written off).
To apply for a DRO an applicant must go through an intermediary Money Adviser. Total assets must be under £1,000 and the disposable income can not be more than £50 per month.
IVAs accounted for over 60% of insolvencies during Q1, 2018 (16,700 in total).
Unlike bankruptcy an IVA enables a debtor to keep their job and their assets, including their home. The fees are much higher, typically around £7,000. During a typical IVA of five years the debtor will make payments to their creditors, expressed as a % in the pound.
Trust Deeds
In Scotland, a Trust Deed is a formal debt solution, similar to an IVA, where the individual agrees to repay a portion of their debts over time. Trust deeds are a matter of public record and should appear on UK credit searches if issued in the last six years. While not specifically separated in this section, they are important for understanding the applicant's financial history.
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