Debt can be a heavy burden for both individuals and businesses. Whether it’s mounting credit card bills, unpaid invoices, or a downturn in business revenue, finding a way to manage debt is crucial for financial stability.

In Wales, there are several legal avenues available to help manage debt effectively, including bankruptcy, Individual Voluntary Arrangements (IVAs), and debt restructuring.

Understanding these options and knowing when to seek legal help can make a significant difference in navigating financial difficulties.

Understanding debt challenges

For many, debt can quickly spiral out of control due to unforeseen circumstances such as job loss, illness, or business challenges. In Wales, the cost of living and economic factors can also contribute to financial strain. The good news is that there are legal options available to help manage or eliminate debt, offering a pathway to regain control of your finances.

Legal options for individuals

Debt Management Plans (DMPs)

Overview:

A Debt Management Plan is an informal agreement between you and your creditors to pay off your debts at a more manageable rate. This option is typically used for non-priority debts such as credit cards, store cards, and personal loans.

How it works:

A DMP allows you to pay one monthly payment to a DMP provider, who then distributes the money to your creditors. This approach does not involve the courts and can help you consolidate your payments. However, it does not reduce the amount you owe or freeze interest and charges, unless your creditors agree.

Individual Voluntary Arrangements (IVAs)

Overview:

An IVA is a formal agreement between you and your creditors to pay off a portion of your debts over a set period, usually five years. It is legally binding and must be set up by a licensed insolvency practitioner.

How it works:

In an IVA, you make regular payments to the insolvency practitioner, who then distributes the funds to your creditors. Once the IVA term ends, any remaining debt is written off. This option protects you from legal action by your creditors, as long as you keep up with the agreed payments.

Bankruptcy

Overview:

Bankruptcy is a legal process that can help individuals who cannot pay their debts. It involves the sale of your assets to pay off your creditors and usually lasts for a year.

How it works:

Filing for bankruptcy should be a last resort, as it can have long-term financial consequences, such as affecting your credit rating and the ability to obtain future credit. However, it does offer a fresh start by wiping out most unsecured debts. You can apply for bankruptcy yourself or creditors can apply to make you bankrupt if you owe £5,000 or more.

Debt Relief Orders (DROs)

Overview:

A Debt Relief Order is suitable for individuals with low income, little or no assets, and debts under £50,000. It is a cheaper alternative to bankruptcy.

How it works:

If you qualify, a DRO stops your creditors from taking any action against you for 12 months. During this time, you do not have to make payments towards most of your debts. At the end of the 12 months, your debts are usually written off, unless your financial situation improves.

Legal Options for Businesses

Company Voluntary Arrangements (CVAs)

Overview:

A Company Voluntary Arrangement allows a business to reach an agreement with its creditors to pay off debts over time while continuing to trade. It is a formal insolvency process that requires approval from 75% of creditors by value.

How it works:

A CVA can help a business reorganise its finances, restructure debts, and continue operating. It is overseen by an insolvency practitioner and allows the company to avoid liquidation. If approved, the CVA is legally binding on all creditors.

Administration

Overview:

Administration is a legal process that places a company under the control of a licensed insolvency practitioner to protect it from creditors while a rescue plan is formulated.

How it works:

The aim of administration is to rescue the company as a going concern, achieve a better result for creditors than immediate liquidation, or sell the company’s assets to repay debts. Administration can provide breathing space for a business to restructure or find a buyer.

Liquidation

Overview:

Liquidation is the process of winding up a company, selling off its assets to pay creditors, and then dissolving the company. It can be voluntary or compulsory.

How it works:

In voluntary liquidation, the company’s directors decide to liquidate the company, usually because it cannot pay its debts. In compulsory liquidation, creditors apply to the court to wind up the company. Once liquidated, the company ceases to exist, and any remaining debts are usually written off.

Debt restructuring

Overview:

Debt restructuring involves reorganizing a company's outstanding obligations to improve liquidity and keep the business afloat. This may include using debt management schemes that aim to help with things such as extended payment terms, reduced interest rates on debts, or converting debt into equity.

How it works:

Debt restructuring is often negotiated directly with creditors and can be a flexible option that avoids formal insolvency procedures. It can provide a company with the time needed to turn its financial situation around without the stigma of bankruptcy or liquidation.

When to seek legal help

If you are struggling with debt, it is crucial to seek legal advice early. A solicitor or licensed insolvency practitioner can help you understand your options, negotiate with creditors, and guide you through the legal processes involved. Professional advice can also ensure that you comply with all legal requirements and protect your assets as much as possible.

At Fonseca Law in Ebbw Vale, South Wales, our experienced solicitors can provide you with tailored advice and support to help you manage debt effectively. Whether you are an individual seeking relief from personal debts or a business looking to restructure, we are here to guide you through every step of the process.

Contact us today to discuss your options and take the first step towards regaining financial control.