In striving to deal with personal insolvency it is practically inevitable that the debtor must consider the two primary solutions to be found in the Uk, namely going into an Individual Voluntary Arrangement (IVA) or petitioning for Bankruptcy. Naturally there might in certain situations be other more favourable options open to the borrower but they mostly belong to the category of the goodness of strangers or of the generosity of a family member. Really, because doing nothing is not an alternative, the majority of people are going to choose one of the two pillars of British legislation governing the resolution of personal insolvency. Ultimately, whatever the quality or quantum of advice sought, it will fall to the insolvent person to make a decision which option to decide on.
To be able to that fateful judgement, the borrower really should consider the pros and disadvantages of each alternative from their own personal position while bearing in mind that other interested people, in particular lenders, could take a different view of the matter. Let’s study the advantages of an IVA first.
An IVA offers the insolvent debtor with respite from their debts while allowing them to pay back as much of their debt as possible to their creditors. It avoids the stigma of bankruptcy with its linked disabilities, restrictions and responsibilities while at the same time it permits the borrower to maintain better control over assets by being able to hold on to their home and car. They can preserve their job or if doing business on a self-employed basis, they can usually continue in enterprise for the entire duration of the IVA, resulting in higher dividends for 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 realizations than bankruptcy, and the administrative costs of an IVA are considerably lower than those in bankruptcy. Both of these factors bring about higher returns for creditors. The borrower is subject to less publicity in an IVA and avoids the compulsory publication in papers and other journals which is common procedure in bankruptcy. If the debtor’s 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. The insolvency business in general is governed by the DTI with oversight review by the OFT on behalf of the consumer.
When an IVA is approved, creditor contact with the borrower ends, 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 the borrower makes affordable monthly payments out of disposable income and may have to contribute a lump sum if he or she owns property which is in positive and realisable equity. A short term IVA can be authorized by lenders when the borrower has hardly any disposable income but can offer 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.
There are also some down sides with an IVA. The insolvent borrower has to pay the set-up, administration and disbursement expenses of the IVA. There isn’t any time related automatic release from an IVA similar to what is obtainable in bankruptcy. 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 the IVA is not approved, creditors are free to use other legal actions such as petitioning for the debtor’s bankruptcy, obtaining court judgments against the debtor or registering charges on the debtor’s assets. A high level of lender authorization is necessary to approve the IVA. At least 75% by value of the voting lenders must agree to the debtor’s proposals for the IVA to be accepted.
Lenders also may insist upon changes to a debtor’s IVA offer which often have the impact of increasing the debtor’s monthly contributions. Creditors frequently cut the debtor’s allowances for cost of living to a more significant degree than what is permitted in bankruptcy. The higher financial burden on the borrower could cause the IVA to be unsuccessful in the course of its term of supervision if the borrower is not able to keep up the increased amount of contributions demanded. 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 may fail in supervision, if the borrower is 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.
The debtor is stopped from undertaking any additional borrowing through the life of the IVA, other than with the express authorisation of the supervisor and lenders. The debtor will endure the consequences of a weak credit rating even after completion of the time period 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 delinquency was first recorded.
Let’s look next at the benefits of bankruptcy. Beginning the course of action is quite easy since insolvent borrowers may petition for their own bankruptcy. Creditors may also petition for a debtor’s bankruptcy. The cost of petitioning is comparitively low – around £700 currently. No other legal charges are incurred. Citizen Advice Bureau officers and Court officers can assist the debtor in filling in relatively simple documents and submitting them. The debtor is 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 the insolvent person in debt and lenders ends with the borrower experiencing the resultant reduced pressure and worry.
The period of time in which the borrower has 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 when the debtor’s disposable income is considered to be too low. The debtor receives more favorable I&E allowances than are allowed in an IVA and consequently is left with additional income on which to live, although this benefit has waned to some extent in recent years.
There are also considerable downsides to bankruptcy. Traditionally and even today the key issue for many people was the stigma of bankruptcy with its linked disabilities, obligations and restrictions which made it hard and frequently impossible for the debtor 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 organizations, which includes the ultimate sanction of expulsion. The insolvent person also faces potential liability for any bankrupt offences he or she 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, the debtor sheds power over his or her assets, and is likely 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 continue to show up on credit files that are maintained by the credit reference firms for six years from the beginning of bankruptcy. The borrower is unable to engage in any further borrowing before discharge 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.
In arriving at a determination, the insolvent debtor can tick the boxes that apply to him or her for both processes. If making a choice continues to be too hard, it’s a good idea to consult with an insolvency specialist who can clarify any remaining queries, bearing in mind the individual circumstances of the debtor and particularly in relation to what the debtor really wants to accomplish in terms of repaying as much as possible of the money owed, evading stigma and reconstructing credit worthiness.