30th May '08 - IVA to the Rescue
According to recent statistics released by the government’s Ministry of Justice, the number of applications for bankruptcy rose to a frightening 13,080 during the first three months of 2008, some 12% more than in the final quarter of 2007. The number of creditors petitioning for bankruptcy against their debtors also climbed by 6% to 4,851. The question that has to be asked is how many of these bankruptcy actions could have been averted by the individuals concerned seeking an Individual Voluntary Arrangement, or IVA.
An IVA can head off the individual’s need to seek a declaration of bankruptcy or his or her creditors’ petition for bankruptcy. If an IVA can be agreed, the debtor enters into a legally binding, formal agreement with all the creditors for the repayment of the maximum possible outstanding debt. The agreement runs for a period agreed between the parties (typically three or five years) and at the end of this period any outstanding balance of debt is considered to be written off – the slate is effectively wiped clean.
An IVA, therefore, can rescue an individual from the financial embarrassment, stigma and lasting effects of bankruptcy. Indeed, one of the first steps in the process of agreeing an IVA is to seek an order from the court that effectively restrains creditors from instigating bankruptcy proceedings.
The key to a successful IVA is getting the creditors to agree that it represents a realistic schedule of repayments of as much of the debt as the individual can possibly afford over the three or five year period. It needs to set out, therefore, a detailed account of all sources of income, expenditure on essential living expenses and committed outgoings, and the balance that is then available to repay the debts. The individual’s commitment to clearing the debts is generally made the more convincing if reasonably large lump sums can be repaid at the beginning of the course of the IVA to start the repayments rolling.
In terms of what the individual needs to retain from his or her income to meet essential ongoing expenses and the amount that is available for repaying the debts, the IVA takes as its standard the sums that the court would otherwise have awarded.
Because an IVA is a formal, legal agreement and because the details of its terms and the process of securing the support of creditors can be complicated, a professional insolvency practitioner needs to be instructed to prepare, monitor and manage its execution. This can be an accountant, a solicitor or a specialist practitioner in IVAs and insolvency matters. His or her fees are incorporated into the total sums repaid during the course of the IVA. Since IVAs are usually employed to recover fairly large debts (£20,000 or more, for example), then the fees involved are also correspondingly high.
So, to conclude, an IVA offers a rescue from an otherwise inevitable slide towards bankruptcy by:
- Offering creditors an opportunity to recover similar amounts of outstanding debts that would have been awarded by the courts in bankruptcy proceedings;
- Allowing the individual to demonstrate a real and effective commitment to repaying the lion’s share of the outstanding debt and to have the slate wiped clean after the IVA has run its course;
- Employing a professional insolvency practitioner to draft, promote agreement of the monitor the IVA.
The author of this IVA article is Charles Wells.
This article does not represent ‘financial advice’ as each individual's personal requirements will be unique to their specific needs. If there is something in the article which you wish to rely on, please check those details with the person with whom you arrange financial services such as IVAs, loans or debt management plans.
The views in this article represent those of the author and not those of Netbasic Limited.
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