It is an unenviable dilemma to be in whenever an insolvent individual is facing a decision as to whether to petition for bankruptcy or go into an Individual Voluntary Arrangement (an IVA). A principal concern is whether one has a property or not. It is likely that one will lose their property in bankruptcy and be able to continue to keep it in an IVA. A key issue is whether there’s realisable value in the property or not. In any case it is a good idea to list the positives and negatives of the two choices and get guidance from a professional insolvency expert in advance of a final choice. The two alternatives need to be checked out and this short article summarises the positives and negatives. The insolvent person in debt should determine which points are important for them.
To start with we will consider the advantages of an IVA. An IVA gives relief from debts while repaying as much as possible to creditors. It avoids the stigma of bankruptcy. It lets you maintain better control over your home and car. It helps you to preserve employment and if you’re self-employed you can often continue in business thus bringing about increased results for creditors. Once approved, an IVA becomes legally binding on all lenders, and this includes those that may have elected to reject the IVA offer and those who didn’t vote at all. An IVA offers bigger realizations and costs less than bankruptcy does, once more bringing about increased returns for creditors. An IVA involves much less publicity than bankruptcy. An Individual Voluntary Arrangement is more adaptable than bankruptcy and it may be modified with the consent of creditors, should the debtor’s circumstances alter severely. There’s far less court participation in an IVA than there is in bankruptcy. The IVA system is controlled by law with a highamount of regulation, overseeing and auditing of the insolvency practitioner’s conduct by the IP’s own regulatory body, the DTI and the OFT. As soon as an IVA is accepted, all lender contact with the person in debt has to discontinue, interest is frozen and penalties are discontinued. All debts are dealt with and written off in a known and finite peroiod of time, commonly five years. Monthly contributions to the IVA are fixed at an affordable level. If the IVA depends wholly or in part on a one-off lump sum payment, the duration could be very short and may even be less than twelve months.
There are also downsides to an IVA. The set up, supervision and disbursement costs of the process are paid out of the monies contributed by the person in debt, hence lowering the payouts to creditors. No less than 75% of voting creditors by value must accept the IVA proposal for it to be approved. Lenders can also vote to alter the terms of the IVA proposal commonly by raising the amount that the debtor should pay and if this is done to an disproportionate level, it can lead to the IVA failing during the term of its supervision. If creditors do not agree to the IVA offer, they are at free once again to go after recovery of the money owed by a number of legal steps such as petitioning for the debtor’s bankruptcy, obtaining court judgments against the person in debt or registering charges on the debtor’s assets.
A particular disadvantage of an IVA is that the time period during which contributions have to be made usually is five years whilst in bankruptcy, payments are restricted to a maximum of three years. The borrower isn’t permitted to borrow during the term of the IVA, other than with the express agreement of the supervisor and lenders. The debtor’s credit rating is impaired for a time period of six years from the start of the IVA and his or her name continues to show up on the credit files kept by the credit reference agencies.
Let’s look now at the advantages of bankruptcy. Any insolvent person in debt may petition for their own bankruptcy and so can any lender, subject to certain conditions. The cost of petitioning is relatively low for the consumer at around £700 nowadays and no additional legal charges areborne. Citizen Advice Bureau officers and Court officers can and often do help infilling out and submitting fairly straight forward documents. There is automatic discharge from bankruptcy for first time bankrupts following one year and it can even be under that at the discretion of the bankruptcy trustee provided the insolvent person is thoroughly co-operative. Nearly all the liabilities will not survive the bankruptcy. There is no additional contact permitted between the bankrupt debtor and creditors. The bankrupt individual will experience a significant decrease in personal stress and worry. Income Payments Orders (IPOs) and Income Payments Agreements (IPAs) are restricted to three years and in many cases no IPO or IPA is applied where the debtor’s disposable income is adjudged to be too low. The borrower is permitted to hold on to a fair amount of funds on which to live while any IPO or IPA is in operation and such living allowances are regarded by some people as more generous than what would be allowed in an IVA.
There are also cons to bankruptcy. The person in debt loses control over their property, in particular their share of the family home. There is appreciable stigma still associated with bankruptcy with its associated disabilities, obligations and restrictions. It can be very difficult and occasionally impossible for the bankrupt person in debt to gain or retain employment and if self employed it can be extremely hard to go on or get started trading. Bankruptcy can be a profession breaker for the reason that many professions and trades impose sanctions on members of their organizations becoming bankrupt, which includes the most significant sanction of expulsion. A bankrupt individual can also be chargeable for bankruptcy offenses. The trustee in bankruptcy has powers to challenge the validity of any preceding transactions if they have been performed preferentially or at an under-value to the potential disadvantage of creditors. As in an IVA the bankrupt borrower will suffer inferior credit ratings even after discharge with their name continuing to be seen on credit files as looked after by the credit reference agencies for six years from the commencement of bankruptcy. The higher costs of bankruptcy result in reduced yields for creditors and in many bankruptcies, creditors obtain nothing at all. The insolvent person in debt cannot engage in any further borrowing prior to discharge from bankruptcy without the express authorisation of the bankruptcy trustee. Some bankruptcy restrictions may be applied for between two and fifteen years.