Insolvency simply means being unable to pay your debts. It sounds daunting, but it's really just a financial description of a situation, not a judgement on you — and being insolvent doesn't mean you're out of options. In fact, there are several formal ways to deal with it, most of which are designed to give you a fresh start.
In this guide we'll explain what insolvency actually means, the two main ways it's measured, and the personal insolvency options available in the UK.
The short answer
- Insolvency means you can't pay your debts as they fall due, or you owe more than you own.
- There are two tests: cash-flow insolvency and balance-sheet insolvency.
- For individuals, the main formal options are an IVA, a debt relief order and bankruptcy.
- Which option fits depends on how much you owe, your income and whether you own assets.
- Getting advice on your options is free, and it's the best first step.
What does insolvency really mean?
Being insolvent is different from just being short of money at the end of the month. It describes a more settled position where your finances no longer add up — either because you can't keep up with payments as they're due, or because the total you owe is more than everything you own. Companies can be insolvent too, but here we're focusing on personal, or individual, insolvency.
The two types of insolvency
Cash-flow insolvency
This is about timing. You're cash-flow insolvent when you can't pay your bills and debts as they fall due, even if, on paper, you own things worth more than you owe. For example, someone might own a car and some furniture but still be unable to find the money for this month's loan and card payments. It's the most common situation people find themselves in.
Balance-sheet insolvency
This is about the overall picture. You're balance-sheet insolvent when your total debts are greater than the total value of everything you own — your assets minus your liabilities is a negative number. You can be balance-sheet insolvent while still managing to make your monthly payments, at least for a while.
Your personal insolvency options
If you're insolvent, there are three main formal routes in England and Wales, each suited to different circumstances.
An Individual Voluntary Arrangement (IVA)
An IVA is a legally binding agreement to pay what you can afford, usually over five or six years, after which any remaining qualifying debt is written off. It can protect your home and lets you keep trading if you're self-employed. To learn more, weigh up the pros and cons of an IVA or check whether you'd qualify.
A Debt Relief Order (DRO)
A debt relief order suits people with a relatively low level of debt, little spare income and few assets. If you qualify, your debts are effectively frozen and then written off after a set period. It's usually much cheaper than bankruptcy.
Bankruptcy
Full bankruptcy can be the right answer where debts are high and there's no realistic way to repay them. It writes off most debts, though assets including your home may be affected. If you're wondering whether things have reached that stage, our guide on the signs you might be facing bankruptcy is a useful read, and you can compare routes with whether an IVA is better than bankruptcy.
How to choose the right route
The best option depends on the size of your debts, whether you have a regular income, and what you own. As a rough guide, smaller debts with little income often point towards a DRO; affordable monthly payments and a wish to protect assets suit an IVA; and very high debts with no way to pay may point to bankruptcy. Informal choices such as a debt management plan may also suit if you're not strictly insolvent but simply need more time.
A note on your credit rating and fees
Any formal insolvency solution will appear on your credit file and affect your rating for a period, so it's worth understanding the trade-offs before you commit. Advice on your options should always be free; fees only apply if you actually take up a solution that carries one, and a good adviser will make any costs clear from the start.
How IVA Advice Online can help
Insolvency can sound frightening, but with the right guidance it's simply the first step towards clearing the debt for good. We'll look at your full situation and explain which routes fit, in plain English and with no pressure. Our advice is free, and we'll only mention a fee if you choose a solution that has one. To talk things through confidentially, get in touch and we'll help you find a way forward.