IVA or Bankruptcy

In the world of personal insolvency, this is the key question facing the insolvent debtor. When both options are clearly spelt out, there is often a clear answer – but not always.Strangely, some debtors sometimes choose to enter an IVA when bankruptcy is clearly a better option in their circumstances and other debtors choose to go the bankruptcy route when an IVA is clearly a better option.

Debtors are not the only ones to make strange decisions. In personal insolvency cases, creditors are likely to have more of their money repaid in an IVA than they would in bankruptcy. Yet creditors often choose to reject IVA proposals or put such stringent conditions on their acceptance (usually described as modifications) that debtors are forced to withdraw their proposals. When this happens debtors frequently have no option but to opt for bankruptcy. Why do creditors do this? It appears to be a no-brainer.

Can it be that creditors are playing a clever strategic pressure game or do they truly believe that debtors are putting forward IVA proposals that are a long way short of their best offer? Do creditors have an unspoken agenda to force more and more insolvent debtors into long term debt management plans or to go bankrupt? Why otherwise would creditors ruthlessly reduce the scheduled living expenses of debtors and seek to increase substantially the monthly contributions that the distraught debtor will have to make, should the modifications be accepted? While the proposal is the debtor’s, the insolvency practitioner acting as nominee has verified that the IVA proposal is fair and feasible for both the debtor and creditors.

Clearly, when creditors apply modifications requiring big uplifts in monthly contributions, they are seriously questioning the integrity and bona fides of the insolvency practitioner. Furthermore, do creditors expect the nominee’s comments that the original IVA proposal was reasonable and realistic to retain their validity, given the substantial changes to income and expenditure needed to yield a greatly enlarged disposible income so as to fund enhanced contributions to the IVA?   

Enough said about the motives of creditors for the moment. The main reasons that debtors choose to propose an IVA are because they wish to avoid the stigma of bankruptcy and because they want to make a genuine offer of re-payment to their creditors. Furthermore, they do not want to lose their family home or their employment, if these are threatened in the event of their bankruptcy.

On the other hand, debtors often opt for bankruptcy if they have no family home to lose or if their property is in zero or negative equity. The monthly payments in bankruptcy are usually for a shorter term than in an IVA and more generous living expenses are allowed. Thus the debtor has less to pay in bankruptcy. The administration costs are usually higher in bankruptcy, so creditors stand to get less of their money repaid and, in many cases get nothing.

There appears to be little difference in the effects of an IVA or bankruptcy on a debtor’s credit file - they are both affected for six years – so that is not a significant consideration in choosing which option to pursue. A reputable insolvency practitioner will explain all options but the final choice remains that of the debtor.    

To explore this option further please contact us at National Debt Relief.

About National Debt Relief

National Debt Relief belong to a firm of leading chartered accountants who are one of the largest insolvency practices in the UK. We offer a complete portfolio of personal insolvency services in relation to IVA, Debt Management Plan and Bankruptcy. All our advice is free. If you decide that you wish to pursue the IVA option, we will still provide advice on all of the other options and if we consider an alternative option to be more appropriate to your case and circumstances, we will tell you this. All of our approved IVA’s are administered by Licensed Insolvency Practitioners. We charge no fees and receive no income until your IVA is accepted by your creditors and then our fees come out of your agreed payments to your creditors. If your creditors do not accept your IVA, we receive no fees whatsoever.

Call us on 0800 043 5135 or 028 71 376854 or email enquiries@nationaldebtrelief.co.uk