Personal insolvency occurs when you are unable to meet your financial obligations and you cannot negotiate repayment terms over a reasonable period. This situation can lead to legal recovery proceedings, such as creditor making you bankrupt, seizing your assets, or getting a county court judgement. Certain priority debts can lead to being cut off from essential supplies like gas and electric, or even prison if you refuse to pay your council tax.

To perform an insolvency test you need to consider a number of different things about your individual situation:

About you personally

• age

• income Status

• income now & predictions for the future

• housing status (homeowner/renter)

• mental & physical health

• the dependents you support financially

• barriers to insolvency options (work, assets etc.)

• your goals

Your Current Finances

Your Debts

• total Debt

• total contractual repayments

• status of Debts - legal action/recovery stages

Your Budget

• spare Income or deficit? (cashflow)

• stability of finances

• budget interventions exhausted

Liquid Assets

• savings

• assets you can sell quickly to repay debt

• help from family/friends

Fixed Assets

• Property

• Long-term investments (accessible pension pot, property)

By highlighting your above individual circumstances, you can get a deeper understanding of your solvency

Once you have identified your current financial position, you need to translate the information to the personal insolvency test.

Personal Insolvency Test Example - Mrs E Purse

Mrs E Purse's personal situation

• age: 54

• Income Status: Single Full-time working professional

• income now & predictions for the future: working until retirement 67 but no improvements expected, state pension + work pension will be less than wages

• housing status: Homeowner with interest only mortgage with equity

• mental & physical health: osteoarthritis being managed

• the dependents you support financially: none

• barriers to insolvency options (work, stigma etc.): stigma is an issue

• your goals: avoid an insolvency solution if possible & retire at 67, downsize property to smaller property with no borrowing, no legacy/will considerations, needs to retain £200,000 for smaller property in retirement community.

Summary:

• has 13 years left as work due to retirement plans (156 months)

• ideally does not really want an insolvency solution

• no dependents

• health could deteriorate

• income will reduce in 13 years time

• wants to downsize property & has equity

• large contingent liability at 67 - interest only mortgage to be repaid

Current Finances

Debts

• total Debt:
  £47,000 unsecured credit debt (minimum 302 months to repay)
  £120,000 secured interest only mortgage (lump sum payable in 13 years)
  No other priority debt

• Total debt £167,000
  
  

• total contractual repayments:
  Unsecured debt contractual repayments are £1200 pcm

Priority Debt: Secured interest only mortgage contractual repayments are £500 pcm and up-to-date

• status of Debts - legal action/recovery stages: informal breathing space - debts on hold temporarily, mortgage up to date but needs to be repaid when Mrs Purse is 67 - home at risk

Budget

• spare Income or deficit? (cashflow without a unsecured debt repayments): £100 pcm 

• stability of finances: stable for 13 years

• budget interventions exhausted: grant application (max £1000), no benefits apart from single person's discount, refused PIP, budgeting tips already apply

Current Finances Summary:

• 26 years to repay unsecured debts - beyond retirement

• Secured debt due in 23 years to repay mortgage

• Unsecured contractual repayments are unaffordable

• Has small spare income & home equity

• Managing contactual debt is unsustainable short-term and long-term
  
  

Liquid Assets

• savings - none

• assets you can sell quickly to repay debt - none

• help from family/friends - none

Fixed Assets

• Property - Equity (after sales fees & to repay mortgage) £200,000, saleable and likely to sell within a year.

• Long-term investments (accessible pension pot, property) - no savings vehicle to repay the interest only mortgage

Summary

By highlighting your above individual circumstances, you can get a deeper understanding of your solvency position.