When you are unable to pay your debts, it is inevitable that you might consider doing one of the big Insolvency solutions that are available in the UK, such as an Individual Voluntary Arrangement (IVA) or Bankruptcy. Naturally there might also be other more favourable solutions available to you also, such as a DRO. When you get to a level of unaffordability where doing nothing is not an option, you will need to research your options. Ultimately, whatever the quality or amount of advice you seek, it will be up to you to make a decision of which option is best.
Weigh up your options
When considering your options, it might be worth looking at the pros and cons for each solution, in relation to your circumstances. Let’s study the advantages of an IVA first.
Advantages of an IVA
An IVA offers you respite from your debts while allowing you to pay back as much of the outstanding debt as possible. It avoids the stigma of bankruptcy with its linked disabilities, restrictions and responsibilities while at the same time it permits you to maintain better control over your assets, such as your home and/or car. You can keep your job or if doing business on a self-employed basis, you can usually continue in enterprise for the entire duration of the IVA, which will result in higher dividends for the creditors.
An IVA 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 perspective of lenders, an IVA will likely yield a greater level of realisations than bankruptcy.
The administrative costs of an IVA are considerably lower than those in bankruptcy. Both of these factors bring about higher returns for creditors.
You are subject to less publicity in an IVA and avoid the compulsory publication in papers and other journals which is common procedure in bankruptcy.
If your circumstances change significantly over the duration of the IVA its terms may, with the permission of lenders, be adjusted.
There is minimal and reducing court participation in an IVA and government policy has been to streamline IVA systems for the benefit of borrowers and creditors alike. The administration of IVAs is nevertheless highly regulated. The insolvency practitioner’s activities are subject to overseeing and auditing by his or her own regulatory body which wields extensive powers of sanction for non-compliance.
When an IVA is approved, creditor contact with you must stop, interest on all unsecured debts is frozen and penalty charges are stopped. All liabilities are tackled and written off in a known and finite length of time, generally five years.
In the majority of IVAs you make affordable monthly payments out of your disposable income (the money left over each month after all other bills are paid). You may have to contribute a lump sum if you own property that has equity.
A short term IVA can be authorised by lenders if you can gain access to a single one-off lump sum payment, with the funds generally coming from the proceeds of the sale of property or from the aid of a third party such as a family member.
Disadvantages of an IVA
There are also some down sides with an IVA. You will be responsible for any fees involved in the administration of the IVA. The time period of an IVA during which payments must be made is often five years versus a maximum of three years in bankruptcy.
If your IVA is not approved, creditors are free to use other legal actions such as petitioning for your bankruptcy, obtaining court judgments, or registering charges on your assets. At least 75% by debt value, of the voting lenders must agree to your IVA proposal in order for it to be accepted.
Lenders also may insist upon changes to your IVA which could have the impact of increasing your IVA payments throughout the 5 year duration. If you are unable to keep up with the proposed changes in an IVA payment, your IVA could fail.
During the last number of years lenders have used the services of voting agencies to act strongly on their behalf at the meetings of lenders where IVAs are approved or rejected. These agencies try to increase the dividend yield from the IVA for lenders. They do this by seeking enhanced contributions from the borrower and by lowering the service fees of the insolvency practitioner (IP). This two-pronged strategy adds to the likelihood that the IVA could fail in supervision, if you are not able to maintain payments, and makes the IVA less commercially viable for the IP. Employing such voting agencies adds expense to the IVA system but creditors may feel that efficiencies brought about and greater debtor contributions result in increased net dividend yields.
You cannot obtain any additional borrowing during the IVA, other than with the express authorisation of the supervisor and lenders.
Your credit rating will be impacted for up to 6 years from the commencement of the IVA.
Bankruptcy Advantages
Let’s look next at the benefits of bankruptcy. Beginning the course of action is quite easy as you can petition for your own bankruptcy. Creditors may also petition for your bankruptcy. The cost of petitioning is comparatively low – around £700 currently. No other legal charges are incurred.
Citizen Advice Bureau officers and Court officers can assist you in filling in relatively simple documents and submitting them. You are automatically released from bankruptcy after one year, provided it is a first time bankruptcy. Most, if not all, debts will not survive the bankruptcy. All further communication involving you and lenders ends on completion of the Bankruptcy, resulting in reduced pressure and worry for you.
The period of time in which you might have to make contributions is restricted. Income Payments Orders (IPOs) and Income Payments Agreements (IPAs) are restricted to three years and in many cases no IPO or IPA is applied if your income is considered to be too low.
Disadvantages of Bankruptcy
There are also considerable downsides to bankruptcy. Traditionally and even today the key issue for many people is the stigma of bankruptcy with its linked obligations and restrictions which make it hard and frequently impossible for you to do business (commence or continue) or to secure or hold on to employment. Bankruptcy can be a career breaker with many professions and trades imposing sanctions on insolvent people in their organisations, which includes the ultimate sanction of expulsion.
You also face potential liability for any bankrupt offences that you may have committed. The trustee has powers to contest the legality of any previous transactions if they appear to be preferential or at an under-value. Some bankruptcy constraints may be placed for between two and fifteen years.
In bankruptcy, you shed power over your assets, and you are likely to lose your home or your share of it. Your poor credit rating continues even after discharge from bankruptcy and your name will continue to show up on credit files that are maintained by the credit reference firms for six years from the beginning of bankruptcy.
You are unable to engage in any further borrowing before discharge or your Bankruptcy, without the express permission of the trustee.
The most significant disadvantage for lenders is that the greater costs of bankruptcy result in lower returns and in many bankruptcies, creditors receive absolutely nothing.
If you’re not sure what Insolvency process is right for you, it is a good idea to speak with a Debt Advisor, who will run through all possible options for you, discuss any queries you might have, what outcome you would like and help you clarify what your best options are. They should be able to help you gain more clarity on what is the best course of action.