Bankruptcy or IVA

Making the Decision

It can be very hard for the insolvent debtor to choose the best option when faced with a choice of entering an IVA or petitioning for bankruptcy. One approach is to weigh up the pros and cons of each solution from one’s own perspective, bearing in mind that the other interested parties, particularly creditors, may have a different view of the matter. Following are the principal pros and cons of both options looked at not just from the perspective of the insolvent debtor but also from the perspective of creditors, the state and the insolvency practitioner.

Pros of an IVA

• Provide insolvent debtors with relief from their debts while enabling them to repay as much of their debt as possible to their creditors.
• Avoid the stigma of bankruptcy with its associated disabilities, restrictions and obligations.
• Enable the debtor to keep better control over his/her assets by being able, for example, to retain their home and car.
• Enable insolvent debtors to retain employment and enable self-employed insolvent traders to remain in business for the full term of the IVA leading to higher returns for creditors.
• Binding on all creditors, including dissenting creditors, provided the IVA is supported by 75% of voting creditors, as measured by value.
• Higher level of realizations than in bankruptcy, leading to higher returns for creditors.
• Lower costs than in bankruptcy leading to higher returns for creditors.
• Less publicity for the insolvent debtor than in bankruptcy (no mandatory publication in newspapers or other periodicals).
• No time related automatic discharge from an IVA (as distinct from bankruptcy).
• Flexibility of varying the terms of the IVA with the agreement of creditors, should the debtor’s circumstances change significantly over the duration of the IVA.
• Minimal and reducing court involvement. The trend is to simplify IVA processes for the benefit of consumers and creditors.
• Regulation of insolvency practices with the insolvency practitioner’s own regulatory body monitoring and auditing insolvency activities with considerable powers of sanction for non-compliance.
• Regulation of the insolvency industry by the DTI with oversight review by the OFT on behalf of the consumer.
• On approval of the IVA, creditor contact with the debtor ceases, interest is frozen and penalties are stopped.
• All debts are dealt with and written off in a known and finite time period – usually five years.
• Affordable monthly payments.
• A one-off IVA via a single lump sum payment is possible with a considerably shorter duration of less than one year is possible.

Cons of an IVA

• The insolvent debtor has to pay the set-up, supervision and disbursement costs of the IVA.
• If the IVA is not approved, creditors are free to pursue other legal actions such as petitioning for the debtor’s bankruptcy, obtaining court judgments against the debtor or registering charges on the debtor’s assets.
• The high level of creditor agreement needed to approve the IVA. At least 75% (By value) of voting creditors must accept the debtor’s proposals for the IVA to be approved.
• Excessive modifications by creditors to a debtor’s IVA proposal. Such modifications often seek to increase a debtor’s monthly contributions to his or her IVA. Such an IVA may fail during its term of supervision if the debtor is unable to sustain the enhanced level of contributions.
• Creditors limit the level of living expenses which a debtor may claim in his or her IVA making it less generous than what is allowed in bankruptcy. This increases the probability that the IVA may fail in supervision if the debtor cannot reasonably live within the limits imposed.
• Term of IVA during which payments must be made is usually five years versus a maximum of three years in bankruptcy.
• No more borrowing allowed during the term of the IVA, except with the express permission of the supervisor and/or creditors.
• The aggressive attitude taken by voting agencies, acting on behalf of groups of creditors, have had a twofold effect on IVAs. Seeking enhanced contributions from debtors increases the probability that the IVA could fail in supervision, if the debtor is unable to sustain payments. Reducing the fees of the insolvency practitioner (IP) may make the IVA commercially unviable for the IP.
• Poor credit rating even after completion of the term of the IVA. Debtor’s name will continue to appear on his or her credit files – as maintained by the credit reference agencies- for six years from the commencement of the IVA or from when default was first registered.

Pros of Bankruptcy

• Insolvent debtors may petition for their own bankruptcy.
• Creditors may also do so.
• Cost of petitioning is low – approx. £600 at present.
• No other legal costs are incurred. Citizen Advice Bureau officers and Court officers assist in completing relatively simple forms and submitting them.
• Automatic discharge from bankruptcy after one year (for first time bankrupts).
• Most, if not all, debts will not survive the bankruptcy.
• No further contact between the bankrupt debtor and creditors.
• Reduced stress and worry.
• Limited duration in which debtor has to make contributions.
• Income Payments Orders (IPOs) and Income Payments Agreements (IPAs) are limited to three years and in many cases no IPO or IPA is applied where the debtor’s disposable income is deemed to be too low.
• More generous I&E allowances than in an IVA. Debtors are left with more income on which to live.

Cons of Bankruptcy 

• Loss of control of debtor’s assets, particularly the debtor’s home or his or her share of it.
• The stigma of bankruptcy with its associated disabilities, obligations and restrictions makes it difficult and sometimes impossible for the debtor to trade (commence or continue) and to obtain or retain employment. Bankruptcy can be a career breaker with many professions and trades imposing sanctions on bankrupt members of their organizations, including the ultimate sanction of expulsion.
• Potential liability for bankrupt offences.
• Trustee’s powers to challenge the validity of any prior transactions if they appear to be preferential or at an under-value.
• Poor credit rating even after discharge. Debtor’s name will continue to appear on his or her credit files – as maintained by the credit reference agencies- for six years from the commencement of bankruptcy.
• The higher costs of bankruptcy result in lower returns for creditors. In many bankruptcies, creditors receive nothing.
• No further borrowing before discharge without the express permission of the trustee.
• Some bankruptcy restrictions may be applied for between two and fifteen years.

Ticking the Boxes

In reaching a decision, the insolvent debtor can tick the boxes that apply to him or her for both processes. If making the decision is still too difficult, it makes sense to consult with an insolvency professional who can clarify any remaining doubts, taking into account the individual circumstances of the debtor and particularly what the debtor wants to achieve in terms of for example: paying back as much as possible of the debts, avoiding stigma, rebuilding credit worthiness and so on.