In looking for a way to deal with personal insolvency it is more or less inevitable that the debtor will have to consider the two primary solutions to be found in the Uk, namely entering into an Individual Voluntary Arrangement (IVA) or petitioning for Bankruptcy. Of course there might in particular situations be other more beneficial solutions available to the debtor however they usually fall into the category of the goodness of strangers or of the generosity of a family member. Really, since doing nothing is not an alternative, the majority of people have to select one of the two pillars of British legislation governing the resolution of personal insolvency. In the end, in spite of the quality or quantum of help and advice sought, it will fall to the insolvent party to come to a conclusion which path to choose.
To be able to that fateful judgement, the borrower really should compare the benefits and downsides of each alternative from their own personal point of view while taking into consideration that other interested individuals, in particular lenders, may take a different view of the case. Let us look at the advantages of an IVA first.
An IVA affords the insolvent debtor with relief from their debts whilst making it possible for them to repay as much of their liabilities as possible to their lenders. It avoids the stigma of bankruptcy with its linked disabilities, restrictions and obligations while at the same time it helps the debtor to maintain better control over assets by being in a position to keep hold of their home and car. They can keep their job or if trading on a self-employed basis, they can generally carry on in business for the entire term of the IVA, contributing to higher yields for lenders.
An Individual Voluntary Arrangement is binding on all lenders, including dissenting creditors, provided the IVA proposal is backed up by 75% or more of voting lenders, as calculated by value. From the standpoint of lenders, an IVA is likely to yield a higher level of realizations than bankruptcy, and the administrative expenses of an IVA are considerably lower than those in bankruptcy. These two factors result in higher yields for lenders. The debtor is subject to significantly less publicity in an IVA and avoids the mandatory publication in papers and other periodicals which is normal procedure in bankruptcy. In the event the debtor’s circumstances change significantly during the timeframe of the IVA its terms and conditions may, with the concurrence of lenders, be changed.
There is minimal and reducing court participation in an IVA and government policy has been to simplify IVA systems for the benefit of debtors and lenders alike. The administration of IVAs is nevertheless highly regulated. The insolvency practitioner’s activities are subject to checking and auditing by his or her own regulatory body which wields considerable powers of sanction for non-compliance. The insolvency industry as a whole is regulated by the DTI with oversight review by the OFT on behalf of the consumer.
After an IVA is approved, lender communication with the borrower ceases, interest on all unsecured liabilities is suspended and charges are halted. All liabilities are dealt with and written off in a known and finite period of time, usually five years. In most IVAs the borrower makes affordable monthly payments out of disposable income and may have to contribute a lump sum if he or she is the owner of property that is in positive and realisable equity. A short term IVA may be agreed upon by creditors where the debtor has little or no disposable income but can offer a single one-off lump sum payment, with the money typically coming from the proceeds of the sale of property or with the assistance of a third party like a family member.
There are also some drawbacks with an IVA. The insolvent borrower has to pay for the set-up, supervision and disbursement costs of the IVA. There isn’t any time related automatic discharge from an IVA similar to what is obtainable in bankruptcy. The time period of an IVA during which payments must be made is commonly five years versus a maximum of three years in bankruptcy. If the IVA is not agreed upon, lenders are free to carry out other legal measures such as petitioning for the debtor’s bankruptcy, getting court judgments against the borrower or registering charges on the debtor’s assets. A high degree of creditor authorization is necessary to approve the IVA. At least 75% by value of the voting creditors must agree to the debtor’s proposals for the IVA to be agreed upon.
Lenders can also impose variations to a debtor’s IVA proposal which normally have the impact of increasing the debtor’s monthly contributions. Creditors often cut the debtor’s allowances for living expenses to a more significant degree than what is allowed in bankruptcy. The higher financial burden on the borrower might cause the IVA to fail during its term of supervision if the debtor is unable to endure the increased amount of contributions demanded. During the last number of years creditors have used the assistance of voting agencies to act assertively on their behalf at the meetings of lenders where IVAs are approved or rejected. These agencies aim to increase the dividend yield from the IVA for lenders. They do this by getting increased contributions from the debtor and by lowering the service fees of the insolvency practitioner (IP). This two-pronged approach increases the likelihood that the IVA may fail in supervision, if the borrower is unable to keep up payments, and makes the IVA less commercially worthwhile for the IP. Using such voting agencies adds overheads to the IVA system but creditors may feel that efficiencies attained and higher borrower contributions result in higher net dividend yields.
The borrower is prohibited from undertaking any additional borrowing during the life of the IVA, except with the express authorisation of the supervisor and creditors. The borrower will experience the consequences of a poor credit rating even after completion of the term of the IVA with his or her name continuing to appear on credit files, as managed by the credit reference agencies, for six years from the commencement of the IVA or from the time when the failure to pay was first registered.
Let us look next at the advantages of bankruptcy. Beginning the process is fairly easy since insolvent debtors may petition for their own bankruptcy. Creditors may also petition for a debtor’s bankruptcy. The cost of petitioning is comparitively low – approximately 700 at the moment. No other legal charges are sustained. Citizen Advice Bureau officers and Court officers will help the borrower in filling in relatively simple documents and submitting them. The borrower is automatically released from bankruptcy after one year, so long as it is a first time bankruptcy. Most, if not all, debts will not survive the bankruptcy. All communications between the bankrupt borrower and creditors ends with the debtor experiencing and enjoying the consequent diminished anxiety and worry.
The timeframe in which the borrower has to make contributions is limited. Income Payments Orders (IPOs) and Income Payments Agreements (IPAs) are limited to three years and in many cases no IPO or IPA is applied when the debtor’s disposable income is considered to be too low. The borrower receives more ample I&E allowances than are granted in an IVA and thus is left with increased income on which to live, although this advantage has receeded to some extent in recent years.
There are also considerable shortcomings to bankruptcy. Over the years and even today the major disadvantage for many people was the stigma of bankruptcy with its associated disabilities, obligations and restrictions which made it hard and sometimes impossible for the debtor to do business (commence or continue) or to obtain or hold on to employment. Bankruptcy can be a career breaker with many disciplines and trades imposing sanctions on insolvent people in their associations, including the ultimate sanction of expulsion. The bankrupt borrower also faces potential liability for any bankrupt offences he or she may have perpetrated. The trustee has powers to question the legality of any preceding transactions if they seem to be preferential or at an under-value. Some bankruptcy constraints may be applied for between two and fifteen years.
In bankruptcy, the debtor sheds control of his or her assets, and is prone to lose their home or their share of it. The debtor’s poor credit rating continues even after discharge from bankruptcy and their name will go on to appear on credit files which are maintained by the credit reference firms for six years from the beginning of bankruptcy. The debtor cannot embark on any further borrowing before discharge without the express authorisation of the trustee. The greatest drawback for lenders is that the excessive costs of bankruptcy mean reduced returns and in many bankruptcies, creditors receive nothing at all.
In coming to a decision, the insolvent debtor can tick the boxes that apply to him or her for both processes. If deciding remains too hard, it makes sense to consult with an insolvency specialist who can clarify any remaining queries, taking into account the individual circumstances of the borrower and in particular in relation to what the debtor would like to achieve in terms of paying back as much as possible of the debts, circumventing stigma and reconstructing credit worthiness.
In case you are thinking about entering into an IVA or even just want information on IVA, contact one of our experts at National Debt Relief, who have got understanding on every debt solution in the marketplace.