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Personal Insolvency
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IntroductionAn individual is insolvent if their liabilities exceed the value of their assets or if they cannot pay their liabilities as they fall due. The common causes are as follows:
1. Borrowing Most people we advise have landed in debt because they have borrowed. There is then a change in their circumstances such as loss of job, loss of overtime, divorce or downturn in trade and they can no longer afford the repayments. People need to modify their lifestyles to live without credit. This means tightening their belts and going without unless they can pay in cash. Credit is very easy to obtain, the only problem is that it has to be repaid with interest. Furthermore, most assets bought on credit depreciate. Consider the difference between borrowing to buy an asset now and saving to buy it at a depreciated price in say 3 years' time. The difference this can make to a person's wealth over a few years can be staggering. It is far better to be earning interest on savings than paying it on borrowings. Lets look at an example: Now let's say you don't need the car immediately and can wait for 3 years. You invest ?12,000 over 3 years and at the end of that period your savings have grown to say ?15,000. You buy the car for ?5,000 and are left with ?10,000 cash. The ?10,000 difference in your wealth under the 2 options at the end of the 3 years can be reconciled as follows:
Now let's assume you were to lose your job a year later and you didn't take out unemployment insurance as the monthly premiums seemed high. You are left with a car that is worth less than the amount of the loan outstanding. 2. Personal Guarantees Directors of limited companies often have to give personal guarantees for example to the landlord, bank or finance company for anything bought on HP. A prudent director would set aside this amount of cash from their own personal funds and invest it to earn interest. If at a later stage, the guarantee is called on, then they can deal with it and can avoid having to sell or re-mortgage their house. If the guarantee is never called on, then the director has a nice nest egg in the future. In our experience, most directors do not set aside funds to provide for guarantees and in many cases, they have guaranteed amounts they have no chance of ever being in a position to pay. 3. Hard Luck This happens to all of us. Bad debts, legal claims, theft, redundancy, sickness and other factors outside our control. A person who has not borrowed or personally guaranteed anything will be in a much stronger position should this happen. Hardship caused by factors outside the debtor's control tend to be looked on more favourably by creditors when proposing deals to settle debts. We have now looked at the causes of personal insolvency and how to avoid it. If you are too late in reading this, the various remedies can be looked at by clicking on the appropriate button. |
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This document explains the relevant position only in general terms. We do not intend it to be used as formal advice about a specific situation, for which you should consult with a qualified insolvency practitioner and not rely upon this document. Portland would be pleased to advise you formally and you should contact one of the directors listed to arrange this. Portland regrets it is unable to accept any responsibility to anybody who seeks to rely on this document. |
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