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.