Bankruptcy or IVA
By Richard Simms – FA Simms & Partners Limited
There is growing speculation that the levels of personal insolvency are set to hit a record high in 2008 with 130,000 individuals being declared insolvent. Up until a few years ago bankruptcy was the only real option available bringing with it social disgrace and sense of shame. However, the government backed a new initiative in the form of an Individual Voluntary Arrangement (IVA) as an alternative to bankruptcy and in 2007 40% of insolvents selected this route. The increase in IVA’s has been matched by a growth of Insolvency Practitioner businesses who promise to solve all debt problems within five years. But IVA’s are not appropriate for all circumstances and the relative merits and drawbacks of both should be carefully considered.
Bankruptcy proceedings can be instigated by the debtor themselves or by a creditor for debts as small as £750. Once a court order of bankruptcy is made assets, including property with equity, can be seized and sold to pay off the debts. Many hire purchase agreements include a clause allowing the agreement to be terminated and the asset repossessed upon bankruptcy. Regular deductions from wages may be required for a 3 year period if the individual has above average earnings.
In contrast, an IVA is a legally binding agreement negotiated through an Insolvency Practitioner (IP) and is drawn up at the request of the debtor. It can only be instigated for combined unsecured debts in excess of £15,000 and with agreement of 75% of creditors. The IVA is a flexible device and varies from case to case but a typical IVA involves the debtor promising to make regular monthly payments for a period of 3 to 5 years which generally rely on having sufficient disposable income of at least £200 per month. As long as all payments are made according to the agreement any remaining debts are written off at the end of the IVA term. Assets will not normally be seized and sold under an IVA plan however there may be a requirement for homeowners to release any equity in their homes to pay their creditors.
The potential impact on employment is often greater under bankruptcy than IVA. Bankrupts are disqualified from acting as a company director for up to 15 years and will not normally be allowed employment within the financial sector. This includes accountants and lawyers specifically. In the case of self employment, business assets will be sold and thus it is unlikely that it will be viable to continue to trade. In addition, bank accounts are frozen and the opportunity to open a bank account in the future is severely restricted. An individual who enters into an IVA is not required to inform their employer or their bank. This means that they will be able to continue their current employment or to trade and will have access to a bank account.
In terms of duration, bankrupts are normally discharged after 1 year but the IVA continues for up to 5 years. In both cases a note will remain on credit reference files for six years resulting in difficulty in obtaining any credit in the future. Even after six years bankrupts are required to declare their bankruptcy and may continue to find it difficult to obtain loans and mortgages.
Perhaps the deciding factor for most people is the privacy element. Bankruptcy notices are posted in the London Gazette and local papers and are clearly in the public domain. This brings with it a social stigma that most would wish to avoid. A register of IVA’s is maintained by the DTI and can be accessed by any interested party, but it requires a proactive stance to acquire the information and thus is less likely to become the subject of local gossip and speculation. This allows insolvents to maintain personal dignity and financial privacy.
The most appropriate choice depends upon the personal circumstances of the individual involved but neither offers a quick fix and should not be undertaken lightly.
