Personal bankruptcy is the most widely known solution to serious personal debt problems, but the popularity of the IVA continues to grow. Seeking IVA help and assistance will clarify whether an Individual Voluntary Arrangement is the right option.
Circumstances when Neither an IVA or Personal Bankruptcy Should Be Considered
Whilst it is possible to declare bankruptcy for debts of £750, the severity of this measure means that it is only sensible to do so when the amount owed is far greater. The suggested amount for debts when entering an IVA is a minimum of £15,000.
A Debt Management Plan may provide a more viable option for smaller debts as declaring bankruptcy for a debt as small as £750 isn't a good idea. A Debt Management Plan allows someone struggling financially to put all debts under one roof, freeze interest payments and make a single monthly payment.
When Should an Individual Voluntary Arrangement Be Considered?
- A home owner. The Official Receiver can sell any assets deemed to be of excessive value to raise money for creditors when someone is declared bankrupt. This includes a family home, car and other possessions. An IVA will allow a debtor to keep them, provided certain requirements are met.
- Holding a job in a profession where personal solvency is critical. Those that work in professions such as: the armed forces, police force, local council, government, legal profession, accountancy and banking are likely to have their career ended prematurely by bankruptcy.
- Don't want the stigma of being declared bankrupt. Personal bankruptcy is advertised in the local paper and London Gazette so it will become public knowledge.
- Involvement in gambling or speculation. Involvement in speculative activities constitutes a bankruptcy offence. This will mean that a Bankruptcy Restriction Order (BRO) will be applied and a debtor can be held financially accountable for up to 15 years.
If none of these scenarios exist, pursuing an IVA is pointless. Declaring personal bankruptcy would release someone from their debts considerably sooner than an IVA. It would also be a lot cheaper. If it appears to be a viable option, consider the downside of an IVA carefully before proceeding.
The Problems Associated with an Individual Voluntary Arrangement
- Raising equity at the end of year 4. Those seeking to protect property will be required to get a remortgage for 80% of available equity. This will form part of the agreement, although affordability will be taken into account.
- The creditor vote. In order to be agreed, an IVA will need to be voted in favour of by 75% of creditors in terms of value. If it is voted against, it is likely that a debtor will be declared bankrupt.
- Monthly contribution. A minimum of £200 is required to be paid towards the IVA.
- Requires an Insolvency Practitioner. A requirement of an IVA is that an Insolvency Practitioner administers the agreement and the charge is usually £4000 to £7000. The cost can be included in the IVA so no up-front payment is required.
- Credit rating. An IVA will show on a credit report for a period of 6 years which is the same as it is for bankruptcy.
- Duration of an IVA. Whilst most people are discharged from bankruptcy after 12 months, an IVA lasts for 60 months. In 5% of cases it can be extended to 72 months.
- Employment. It is necessary to have a full time job and prove affordability.
When Personal Bankruptcy is the Right Option
There is no point in starting an IVA if the debtor has a factory job and rents a council house. Although declaring personal bankruptcy can be embarrassing, it would provide that person with a faster route out of their financial difficulties.
If an IVA is to be accepted, the terms must be more rewarding to the creditor than having the debtor declared bankrupt. Get as much IVA information as possible before heading down this route as it is a long commitment and a lot can happen in 5 years.
Asa Ghaffar - Asa has over 10 years of practical experience in loan approval, secured lending, bad credit repair, stock trading and debt management.
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