It is not uncommon for most people to consider bankruptcy as a solution when personal debt becomes overwhelming. However, there is an alternative solution to bankruptcy which is far less restrictive and can be beneficial for the debtor. An Individual Voluntary Arrangement (IVA) is a formal arrangement reached between the debtor and his/her creditors whereby the debtor agrees to pay a percentage of all existing debts over the term of the IVA, which is typically a period of 5 years. If the IVA term is completed without default by the debtor the creditors agree to accept the percentage payment in full and final settlement of the existing debts.

The debtor’s IVA Proposal must be prepared by an Insolvency Practitioner who acts as the debtor’s Nominee until the IVA is accepted or rejected. The Insolvency Practitioner sends the IVA Proposal to all known unsecured creditors (not including the debtor’s mortgage company unless there is negative equity). Each creditor votes to either accept or reject debtor’s the IVA Proposal. There may be scope for the IVA Proposal to be changed and/or improved if it is rejected. For an IVA Proposal to be accepted creditors amounting to 75% of the total debts owing by the debtor must vote to accept it (i.e. if the debtor owes a total of £20,000 in unsecured debts then creditors whose debts collectively amount to £15,000 must vote to accept the IVA). If the debtor’s IVA Proposal is accepted it will be overseen by the Insolvency Practitioner, who will act as Supervisor during the agreed term. It should be noted that Insolvency Practitioners charge a minimum of £800 plus VAT to prepare an IVA Proposal, and if accepted the costs of supervising the IVA could be as much as £3,000 plus VAT. At the end of the term of the IVA any outstanding debt is usually written off. It should be noted that if the debtor fails to keep to the agreed IVA terms the Supervisor is likely to apply to court for a bankruptcy order.

It should be noted that IVAs, just like bankruptcy, are restrictive in their nature. It is not simply a case of agreeing an IVA, paying off a percentage of the total debt owing to the creditors, and writing off the balance of the debts you owe. There are some important matters relating to a debtor’s existing and future finances which must be fully considered before a decision is made to proceed with an IVA.

Matters Relating to Current Assets

Assets such as the debtor's home, any savings and investments are at less risk in an IVA than with bankruptcy, although the creditors may require that they be included within the IVA Proposal to release any equity in the debtor's property. Equity is the amount available after the mortgage is deducted from the total value of the property (e.g. property value of £200,000, less mortgage of £100,000 = equity of £100,000). However, it is usual for creditors simply to require the debtor to cash-in any savings and/or other realisable assets (i.e. endowment policies, shares, premium bonds, ISAs) which would be made available to the creditors within the IVA.

Matters Relating to Future Assets and Credit

During the term of the IVA a debtor may expect to receive an inheritance or there are existing assets (i.e. the debtor’s home, shares, or car if not subject to Hire Purchase) that may increase in value. Careful thought needs to be given to any potential increase in value of such assets or the receipt of an inheritance. It may be possible to avoid any difficulties arising by making appropriate arrangements within Wills and/or Trusts. However it should be noted that assets cannot be transferred into the names of third parties with the intention to put such assets out of the reach of the creditors.

An IVA will have a negative effect on the debtor’s credit rating as it will be included in the debtor’s credit file held with Credit Reference Agencies. Lenders may be reluctant to make credit available to the debtor during the term of the IVA. Any application for credit both during and after the term of the IVA would require the debtor to disclose the existence of the IVA. If a Lender agrees to make credit available to the debtor it would usually for the Lender to charge a higher rate of interest as it would consider the debtor to a greater lending risk.

To enable us to consider your financial circumstances and the suitability of an IVA as a solution please COMPLETE THE ON-LINE APPLICATION FORM