How to Choose Between an Individual Voluntary Arrangement and Bankruptcy

By Eldon Cunningham


It is really an unenviable difficulty to be in when an insolvent individual is confronted by a choice whether or not to petition for bankruptcy or go into an Individual Voluntary Arrangement. A principal point is whether one has a property or not. It is likely that one will relinquish their property in bankruptcy and be able to keep it in an IVA. A key factor is if there is realisable value in the property or not. At any rate it's a good idea to list the benefits and drawbacks of both choices and get advice from a professional insolvency expert before a final choice. Each of the two remedies ought to be checked out and this short article summarises the disadvantages and benefits. The insolvent person in debt should determine which considerations are important for themselves.

To start with we are going to look at the benefits of an IVA. An IVA provides relief from debts whilst trying to repay as much as possible to lenders. It avoids the stigma of bankruptcy. It will let you keep better control over your residence and car. It helps you to keep employment and if you are self-employed it is possible to continue in business so creating higher results for lenders. When it is approved, an IVA is binding on all lenders, and this includes those that may have voted to reject the IVA offer and those that just didn't vote at all. An IVA delivers greater realizations and costs considerably less than bankruptcy does, once again resulting in increased dividends for lenders. An IVA involves considerably less publicity than bankruptcy. An IVA is much more adaptable than bankruptcy and it may be varied with the acceptance of lenders, should the debtor's circumstances change severely. There's far less court participation in an IVA than there is in bankruptcy. The IVA process is controlled by law with a great degree of regulation, overseeing and auditing of the insolvency practitioner's practice by the IP's own regulatory body, the DTI and the OFT. After an IVA is approved, all lender contact with the debtor must end, interest is suspended and penalty charges are ended. All liabilities are dealt with and written off in a known and finite time period, often five years. Monthly payments to the IVA are set at an affordable amount. If the IVA depends fully or in part on a once-off lump sum payment, the time frame can be quite short and might even be less than one year.

There are also drawbacks to an IVA. The setup, supervision and disbursement costs of the process are paid out of the funds contributed by the person in debt, hence decreasing the payouts to creditors. At the very least 75% of voting lenders by value have to accept the IVA proposal for it to be approved. Lenders can also vote to change the provisions of the IVA proposal often by increasing the amount of money that the person in debt must pay and if this is done to an disproportionate degree, it can lead to the IVA failing within the term of its supervision. If lenders don't accept the IVA offer, they are without delay free once again to chase recovery of the money owed by a number of legal actions for example petitioning for the debtor's bankruptcy, obtaining court judgments against the borrower or registering charges on the debtor's assets. A particular disadvantage of an IVA is that the term during which payments must be made is typically five years while in bankruptcy, payments are confined to a maximum of three years. The person in debt isn't permitted to get a loan during the term of the IVA, except with the express permission of the supervisor and lenders. The debtor's credit standing is damaged for a time period of six years from the commencement of the IVA and his or her name continues to show up on the credit files maintained by the credit reference agencies.

Let's look now at the good things about bankruptcy. Any insolvent debtor may petition for their own bankruptcy and so can any lender, subject to certain conditions. The expense of petitioning is relatively low for the debtor at around 700 at this time and no other legal expenses are incurred. Citizen Advice Bureau officers and Court officers can and often do help out with completing and presenting fairly simple forms. There is automatic release from bankruptcy for first time bankrupts following 12 months and it can even be under that at the discretion of the bankruptcy trustee as long as the bankrupt borrower is fully co-operative. Most of the debts will not survive the bankruptcy. There is no further communication allowed between the insolvent person and lenders. The bankrupt individual will enjoy a significant decrease in personal anxiety and worry. Income Payments Orders (IPOs) and Income Payments Agreements (IPAs) are limited to three years and quite often no IPO or IPA is applied where the debtor's disposable income is adjudged to be too low. The consumer is permitted to hold on to a reasonable amount of money on which to live while any IPO or IPA is in operation and such living allowances are looked on by some people as more generous than what would be permitted in an IVA.

There are also disadvantages to bankruptcy. The consumer loses control of their assets, especially their share of the family home. There is considerable stigma still that is attached to bankruptcy with its associated disabilities, obligations and restrictions. It can be very difficult and sometimes not possible for the insolvent person in debt to acquire or retain employment and if self employed it can be extremely difficult to carry on or get started trading. Bankruptcy can be a profession breaker given that many professions and trades apply sanctions on members of their organizations becoming bankrupt, including the ultimate sanction of expulsion. A bankrupt individual can also be liable for bankruptcy offences. The trustee in bankruptcy has powers to challenge the validity of any preceding financial transactions if they have been carried out preferentially or at an under-value to the potential disadvantage of creditors. As in an IVA the bankrupt borrower will face bad credit ratings even following discharge with their name continuing to show up on credit files as managed by the credit reference agencies for six years from the commencement of bankruptcy. The greater expenses of bankruptcy lead to reduced dividends for creditors and in many bankruptcies, lenders receive nothing at all. The insolvent person in debt can't engage in any further borrowing before release from bankruptcy without the express approval of the bankruptcy trustee. Some bankruptcy restrictions may be applied for between two and fifteen years.




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