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Coronavirus: Uncertain times for personal finances

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The current lockdown has dealt a drastic blow to the UK’s economy with many businesses having to close their doors. This has resulted in a large number of them having substantially reduced or no revenue and having to rely upon government support and the furlough scheme to pay their employees. 

The lockdown has obviously caused a lot of financial stress to businesses and individuals alike. The roadmap recently laid out by Boris Johnson, does little at this stage to alleviate the current economic situation.

In most cases, those employees who have been furloughed are receiving 80% of their salary up to a limit of £2,500 per month. Therefore, a lot of individuals and families will have seen a dramatic overnight reduction in their income which for many will be causing them difficulty in managing their personal finances.

If individuals are experiencing financial difficulties at this time, there are a number of options available to them. 

Firstly, if an individual has a limited number of creditors or their creditors are the major financial institutions, it may be possible to negotiate a payment holiday in the short term and/or a reduced repayment plan going forwards.

If, however, an individual has a greater spread of unsecured creditors, it may not be possible to informally negotiate a position with each of their creditors which is sustainable. In these circumstances it may be possible for the individual to enter an Individual Voluntary Arrangement.

What is an IVA and how does it work?

An Individual Voluntary Arrangement (“IVA”) is, in essence, a contractual arrangement between an individual and their creditors setting out how the individual’s debts will be paid.  Usually an IVA lasts between three and five years, with the individual making a monthly payment or a lump sum payment that is shared equally between their creditors.

An insolvency practitioner is appointed as the individual’s supervisor, and the contributions are paid to the supervisor who then deals with distributing the monies to the creditors.  The creditors receive an x pence in pound for their debt and at the end of the IVA the balance of the debt is written off.

The individual’s contribution is worked out by looking at what that individual can globally afford to pay to their creditors. The creditors vote on whether the proposal is acceptable, and the IVA is approved if 75% of the creditors in value voting vote in favour. If there are creditors who vote against the proposal, they are still bound by it if the requisite 75% vote for it.

If an IVA is not viable, an individual can look to petition for their own bankruptcy. This is a court led process. If an individual is adjudged bankrupt, a Trustee in Bankrupty is appointed. The individual’s assets vest in their trustee on the making of the bankruptcy order, and it is then the trustee’s role to collect in the individual’s assets and realise these for the benefit of the individual’s creditors.

People generally want to avoid bankruptcy but, dependent upon individual circumstances, bankruptcy is often the best solution.  An individual is usually discharged from bankruptcy after 12 months, and any debt that existed prior to the bankruptcy order is written off.

At this uncertain time, lots of people will be facing financial uncertainty and experiencing the associated stress.  As set above, there are a number of options available for people to be proactive and try to manage the situation as best as they can. 

If you have any queries about the options available to you, please contact a member of Business Restructuring and Insolvency Team.

Disclaimer: Anything posted on this blog is for general information only and is not intended to provide legal advice on any general or specific matter. Please refer to our terms and conditions for further information. Please contact the author of the blog if you would like to discuss the issues raised.