IVA - Bankruptcy Alternative Approach

FOR individuals sinking under debt, bankruptcy is often the most attractive option.
But the Government and insolvency experts are urging individuals on the brink of financial ruin not to walk blindly into bankruptcy but to consider another option: the individual voluntary arrangement (IVA).

These agreements, a product of the Insolvency Act 1986, enable the debtor to stave off bankruptcy by coming to an agreement with his creditors to pay off a percentage of his debts over a given period.

There are no hard and fast rules — an IVA is essentially a haggling process between the individual, his insolvency practitioner and creditors. Generally, though, the debtor will pay a lump sum upfront to the creditors and the insolvency practitioner, followed by a series of monthly payments.

The repayments are calculated through an analysis of the debtor’s income and expenditure. Once agreed, the repayment programme forms part of a legally binding contract, although the creditors can still force the debtor into bankruptcy if he does not meet his side of the deal. There is one other catch: an IVA can go ahead only if creditors representing more than 75 per cent of the debt agree to the deal.

But for the debtor, an IVA also offers many attractions. He avoids the stigma of bankruptcy and the severe penalties. For people whose careers could be put at risk by bankruptcy, such as lawyers and financial practitioners, the IVA is particularly attractive.

The Government has its own interest in encouraging uptake. IVAs are dealt with by commercial insolvency practitioners rather than the office of the Official Receiver at the DTI, so the greater the uptake of these, the less pressure on the Government’s resources.

While there are about 9,000 bankruptcies each quarter, only a tiny fraction of that figure enter into IVAs. The reasons, says Nick Hood, senior partner at Begbies Traynor, the insolvency experts, are many. He explains: “Some individuals go straight to the court and file for bankruptcy, without seeking the service of a professional insolvency practitioner, so they never hear about the alternatives. Another problem has been the number of rogue practitioners who take a fee to set up agreements that are totally unrealistic. They have tarnished the reputation of the IVA.”

Cost is also a deterrent, with the professional and other fees often looking hefty compared with the debt owed. And, of course, the agreements are an option only for those with sufficient assets or an income stream that will allow them to make an offer to creditors.

Insolvency experts say that the Government must boost awareness and bring down the costs if it is to succeed in increasing uptake of the IVA as an alternative to bankruptcy.

The key for those considering an IVA, Mr Hood says, is to take professional advice early on. Reputable insolvency practitioners usually do not charge for initial advice.

R3, the insolvency association, warns anyone entering into an IVA not to agree to any deal that is not realistic and achievable. “It could still fail later and you might then face bankruptcy in two or three years’ time.”

R3 publishes a guide to IVAs, Is a Voluntary Arrangement Right For Me?, which is available on the website at www.r3.org.uk/publications. The DTI’s A Guide to Bankruptcy is available at www. insolvency.gov.uk.