IVA: a preferable alternative to bankruptcy?

29 September 2008

If you’re struggling with debts of £15,000 or over that you think you are unable to repay, you may be considering an IVA (Individual Voluntary Arrangement). An IVA is a legally-binding agreement between you and your creditors that enables to repay only what you can afford.

IVAs were introduced by the Government as part of the Insolvency Act 1986, as an alternative to bankruptcy. By comparison, an IVA will enable creditors to reclaim more of the money they are owed. However, that is not to say that an IVA is always the ‘preferable’ option.

IVA: step-by-step
1) If your debt adviser thinks an IVA is your best option, they will draw up a proposal which tells your creditors how much they would receive if the IVA goes ahead.

2) The proposal is then submitted to your creditors for approval. A Creditors’ Meeting will be arranged – although in reality, it’s rare for this to physically take place; voting is more often conducted by telephone or in writing,

3) The Creditors’ Meeting invites your creditors to get together and vote on whether to approve your IVA proposal. For the IVA to go ahead, those who vote in favour of the proposal must collectively own more than 75% of your total debts.

4) If approved, the IVA begins and you will pay a fixed amount each month, which will then be divided between your creditors. This will usually take place over 5 years. Your creditors are legally required to stop charging interest and may no longer pursue any kind of legal action, unless the terms of the IVA are broken.

5) If you are a homeowner, you will be required to free up the majority of any equity in your home in the 4th year of your IVA, and this will also be divided between your creditors.

6) If you successfully keep up payments for 5 years, the IVA is complete and you are legally debt-free. However, the IVA will not disappear from your credit history for another year.

Why is an IVA considered ‘preferable’ to bankruptcy?
There are a number of perceived advantages of IVAs:

• While the damage to your credit history is more or less equal to bankruptcy, an IVA shows willing to clear your debts, which may reflect well to future creditors.
• If you are in business, an IVA should not prevent you from running your own business or acting as director of a company, unlike bankruptcy.
• IVAs tend to strike the best balance between your needs and that of your creditors: you settle your debts, including some debt relief whilst avoiding the strict limitations of bankruptcy, while your creditor should receive more than they would through bankruptcy proceedings.

Does bankruptcy have any advantages over IVAs?
Bankruptcy, according to the Insolvency Service, “should always be the last resort, as the debtor will lose control of their assets and will be subject to bankruptcy restrictions, potentially up to 15 years”.

However, bankruptcy may be better if:

• you only have a very limited disposable income, and are unlikely to be able to repay your debts in a realistic timeframe, and
• you have few valuable assets, and
• your circumstances are unlikely to change.

Bankruptcy is also over much quicker than an IVA. You are officially ‘discharged’ of bankruptcy after 12 months – meaning your debts are legally settled (although you may have to agree to an Income Payments Agreement for up to three years).

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