IVA or Bankruptcy

When someone is threatened with insolvency or if they are already insolvent the focus on what to do next is often governed by best self interest. And this is not a bad thing. It usually leads to the right decision for the debtor and will often be the best course of action for the other parties affected, particularly creditors.

The decision to be taken is often whether to go for bankruptcy or an IVA. Let’s assume that all other options, such as a rich relative coming to the rescue, have been ruled out and there is a simple choice to be made. So let’s look at the things that the two courses of action have in common, how they differ and how they pan out when compared in this way.

The four main considerations from the debtor’s point of view are usually money, time, publicity and perception. Under the money banner would be questions as to how much will I have to pay, how much money will I be left to live on, how much will the process cost, how much of my debts will be repaid to my creditors and will my home or other assets be touched?

Under the heading of time, the questions are usually how long will it take for the process to get up and running, how long will it last, when will my credit file be repaired, when will I be able to borrow again and will I be prevented from taking out a mortgage in the future?

Under the twin banners of publicity and perception debtors are often concerned as to who will find out about their financial predicament, particularly family and extended family, neighbours, work colleagues, employer and personal creditors i.e. family, friends or colleagues who have lent monies to the debtor . What will people think of me is a real concern for many people and will my name be published for all to see?

So from the money point of view the debtor in an IVA has to pay back what he or she can afford usually over a period of five years, although it can go up to six or seven years in some instances and it can be as little as six months in certain circumstances.

Creditors also consider the two processes mainly from the repayment and timescale perspectives: how much money will we get back and over what period of time? They are usually not concerned about publicity or the perceptions of others. It is simply business.

So from the money point of view the debtor in an IVA has to pay back what he or she can afford usually over a period of five years, although it can go up to six or seven years in some instances and it can be as little as six months in certain circumstances. They are allowed to retain sufficient income to live on i.e. for their own needs and those of their dependents. The amount retained covers all normal living expenses including mortgage or rental expenses. What is left over is called disposable income and is paid into the IVA. Bankruptcy operates in a similar way but the timescale for making payments usually via an Income Payments Order (IPO) or an Income Payments Agreement (IPA) is capped at three years in most cases. So the debtor is likely to pay a lot more into an IVA than what would be payable in bankruptcy. The administration costs in bankruptcy are usually also greater than in an IVA so that the returns to creditors are greater in an IVA than in bankruptcy.

How much of the debts are repaid varies hugely from one case to the next but in general terms many IVAs have a payback to creditors in the range of 25p in the £ to 35p in the £. In bankruptcy the payback is usually considerably less. A major consideration for debtors is whether they will lose their home or not. It is fair to say that debtors in bankruptcy are much more likely to lose their home than those in an IVA. Much depends on how much if any equity there is in the home and what the mortgage costs are and what the debtor’s individual circumstances are. However, a good insolvency practitioner can project the likely outcomes for both an IVA and bankruptcy in terms of losing the property or not. Even if a debtor can retain their home in an IVA, they will usually have to address a significant portion of any equity within by for example making additional monthly contributions to the IVA for a limited period (often an extra twelve months).

The considerations under the heading of time are clear and simple enough. A debtor can file for bankruptcy and the time from then until the bankruptcy order is made can be as little as seven days but it could be as much as a month or more depending on the time of year and the court schedule. By contrast, an IVA will usually take from six to eight weeks between initial enquiry with an insolvency practitioner and when the meeting of creditors is held. However, the timescale can be shorter when the debtor has a simple case and all required information is provided promptly. As mentioned above most IVAs last for five years but there are exceptions and it can be for a shorter or longer period. By contrast, discharge from bankruptcy is usually within twelve months with the IPO or IPA running for a further two years or three years in all. However, the effects on the debtor’s credit files are very similar regardless of whether it’s an IVA or bankruptcy. The clock starts running from the time the debtor defaults. This is usually at the time the IVA is accepted by creditors or the time when the bankruptcy order is made. However, in many cases the defaults may have begun to be recorded several months before that when the debtor began to miss making payments. The important thing is how long the clock runs for and that is six years. Credit files can be begun to be repaired six years from initial defaults so the effect is similar whether the debtor opts for an IVA or bankruptcy. As to whether a debtor will be able to take out a mortgage or borrow in the future, the answer is yes but obviously it will be more expensive until the credit files are fully repaired and some positive financial history is created.

There is no doubt that bankruptcy carries a much greater stigma than an IVA particularly in the perception of the debtor. The publicity is much greater with the bankrupt debtor’s name being published in periodicals and the press which doesn’t occur in the case of an IVA. Although names of debtors in both bankruptcy and in IVAs are put up on the register of The Insolvency Service, one is much more likely to slip under the radar in an IVA as compared to bankruptcy. Apart from the publicity, there are more occupations where bankruptcy is a barrier to advancement and promotion than applies in the case of an IVA. All in all this is one heading where the IVA scores higher in the mind of the debtor than bankruptcy.

Written by Paddy Pyrne
30 / 10 / 2012