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Choose IVA or Bankruptcy

The key question facing the insolvent debtor is whether to enter into an IVA or to petition for bankruptcy. If the debtor has consulted with an Insolvency Practitioner (IP), both options will have been spelt out clearly as well as any other available options. While the IP’s preferred option is often clear it remains the debtor’s decision as to which option to choose. Strangely, some debtors 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, an IVA usually promises to return more money to creditors than bankruptcy does and yet creditors often choose to reject IVA proposals or to put such very stringent conditions on their acceptance (called modifications) that debtors are forced to withdraw their proposals. When this happens debtors frequently have no option but to opt for bankruptcy. It is unclear why do creditors adopt this strategy since it appears to be a no-brainer.

Choosing between IVA or Bankruptcy

It is unlikely that creditors are playing a strategic game in the belief that debtors’ IVA proposals are a long way short of the best offer they could make. Perhaps creditors have an unspoken agenda to force more and more insolvent debtors into long term debt management plans (DMP) or to go bankrupt? Why otherwise would creditors harshly 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 IVA proposal is being made by the debtor, the insolvency practitioner acting as nominee has already affirmed and verified that the IVA proposal is fair and feasible for both the debtor and creditors.

When creditors apply modifications to IVAs 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?   

Regardless of the motives of creditors in relation to accepting or modifying IVA proposals, the main reasons that debtors choose to propose IVAs 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, both of which can be 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 allowable living expenses are reasonably generous although there is some evidence that these are being tightened up in recent years. Thus it is likely that the debtor will have less to pay in bankruptcy than in an IVA. 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. 

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