In looking to cope with personal insolvency it’s almost inevitable that the debtor will have to examine the two most important solutions to be found in the Britain, namely entering into an Individual Voluntary Arrangement (IVA) or petitioning for Bankruptcy. Undoubtedly there may in particular cases be other more beneficial options open to the borrower but they mainly belong to the category of the kindness of strangers or of the generosity of a family member. Really, because doing nothing is not an alternative, most individuals are going to go for one of the two pillars of British legislation regulating the resolution of personal insolvency. In the end, regardless of the quality or quantum of help and advice sought, it will fall to the insolvent individual to choose which approach to go for.
In order to make that fateful final decision, the debtor really ought to consider the advantages and downsides of each solution from their own personal perspective while remembering that other interested individuals, in particular creditors, might take an alternative view of the matter. Let’s study the benefits of an IVA to begin with.
An IVA offers the insolvent debtor with relief from their obligations while allowing them to pay back as much of their liabilities 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 retain better control over assets by being able to retain their home and car. They can retain their employment or if doing business on a self-employed basis, they can often stay in business for the entire duration of the IVA, leading to increased yields for lenders.
An Individual Voluntary Arrangement is binding on all lenders, including dissenting lenders, if the IVA offer is backed up by 75% or more of voting creditors, as measured by value. From the standpoint of lenders, an IVA will probably render a better level of realizations than bankruptcy, and the administrative costs of an IVA are appreciably less than those in bankruptcy. Those two features bring about bigger returns for creditors. The borrower is subject to less publicity in an IVA and avoids the mandatory publication in newspapers and other journals which is normal procedure in bankruptcy. If the debtor’s circumstances change substantially over the timeframe of the IVA its conditions may, with the consent of lenders, be modified.
There is minimal and reducing court participation in an IVA and government policy has been to streamline IVA systems for the benefit of debtors and lenders alike. The administration of IVAs is nevertheless highly controlled. The insolvency practitioner’s activities are subject to inspection and auditing by his or her own regulatory body which wields considerable powers of sanction for non-compliance. The insolvency business as a whole is regulated by the DTI with oversight review by the OFT on behalf of the consumer.
When an IVA is accepted, creditor communication with the borrower ends, interest on all unsecured liabilities is frozen and penalty charges are ended. All debts are tackled and written off in a known and finite time frame, ordinarily five years. In the majority of IVAs the debtor makes affordable monthly payments out of disposable earnings and might have to contribute a lump sum if he or she owns property which is in positive and realisable equity. A short duration IVA may be accepted by lenders when the debtor has little or no disposable income but can offer a single one-off lump sum payment, with the funds usually coming from the proceeds of the sale of assets or via the assistance of a third party such as a family member.
There are also some downsides with an IVA. The insolvent borrower has to pay 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 usually five years as opposed to a maximum of three years in bankruptcy. If the IVA is not approved, creditors are free to go after other legal measures such as petitioning for the debtor’s bankruptcy, obtaining court judgments against the debtor or registering charges on the debtor’s assets. A high degree of lender authorization is required to accept the IVA. A minimum of 75% by value of the voting lenders must agree to the debtor’s proposals for the IVA to be agreed upon.
Creditors also may insist on modifications to a debtor’s IVA proposal which often have the effect of escalating the debtor’s monthly contributions. Creditors frequently cut the debtor’s allowances for cost of living to a more significant extent than what is allowed in bankruptcy. The higher financial obligation on the borrower could cause the IVA to break down in the course of its term of supervision if the borrower is not able to endure the increased level 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 accepted or rejected. These firms aim to maximize the dividend yield from the IVA on behalf of creditors. They do this by looking for increased contributions from the debtor and by lowering the service fees of the insolvency practitioner (IP). This two-pronged strategy increases the chance that the IVA may be unsuccessful in supervision, if the debtor is not able to keep up payments, and makes the IVA less commercially viable for the IP. Utilizing such voting agencies adds costs to the IVA system but lenders may feel that efficiencies brought about and increased debtor contributions result in higher net dividend yields.
The debtor is prohibited from undertaking any additional borrowing during the life of the IVA, except 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 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 start of the IVA or from the date when the default was first registered.
Let us look next at the advantages of bankruptcy. Commencing the course of action is fairly easy since insolvent debtors may petition for their own bankruptcy. Creditors may also petition for a debtor’s bankruptcy. The expense of petitioning is comparitively minimal – about £700 at this time. No other legal charges are sustained. Citizen Advice Bureau officers and Court officers will help the debtor in filling out relatively simple forms and submitting them. The debtor is automatically released from bankruptcy after one year, provided that it is a first time bankruptcy. Most, if not all, liabilities will not survive the bankruptcy. All further contact between the bankrupt person in debt and lenders stops with the debtor experiencing the resultant diminished stress and hassle.
The period of time in which the borrower has to make contributions is limited. Income Payments Orders (IPOs) and Income Payments Agreements (IPAs) are restricted to three years and in many cases no IPO or IPA is applied where the debtor’s disposable income is judged to be too low. The debtor receives more ample I&E allowances than are permitted in an IVA and thus is left with increased money on which to survive, although this advantage has waned to some degree in recent years.
There are also significant drawbacks to bankruptcy. Historically and even today the major drawback for many people was the stigma of bankruptcy with its linked disabilities, obligations and restrictions which made it difficult and sometimes impossible for the debtor to do business (commence or continue) or to attain or retain employment. Bankruptcy can be a career breaker with many disciplines and trades imposing sanctions on bankrupt members of their organizations, including the supreme sanction of expulsion. The bankrupt debtor also faces potential liability for any bankrupt offences he or she may have perpetrated. The trustee has powers to contest the legality of any preceding transactions if they seem to be preferential or at an under-value. Some bankruptcy constraints may be placed for between two and fifteen years.
In bankruptcy, the debtor loses control over his or her assets, and is very likely to lose their home or their share of it. The debtor’s bad credit score remains even after release from bankruptcy and their name will go on to appear on credit files that are maintained by the credit reference firms for six years from the commencement of bankruptcy. The debtor is unable to engage in any additional borrowing prior to discharge without the express permission of the trustee. The greatest drawback for creditors is that the greater costs of bankruptcy result in reduced dividends and in many bankruptcies, creditors get nothing.
In coming to a decision, the insolvent debtor can tick the boxes that pertain to him or her for both processes. If making the decision continues to be too difficult, it seems sensible to talk with an insolvency specialist who can clarify any remaining questions, considering the personal circumstances of the borrower and especially in relation to what the borrower wants to achieve with regard to repaying as much as possible of the money owed, avoiding stigma and rebuilding credit worthiness.