IVAs And Bankruptcy

In some cases, your debts might be so great that you have no hope of paying them off. However, it's not the end of the world as you still have two final options: an Individual Voluntrary Arrangement and bankruptcy.

Recent changes in bankruptcy law, plus the increased levels of debt many of us have taken on, has led to a massive increase in the number of people taking these routes, as the table below shows:

Year	Bankruptcy	IVAs	Combined
1997	19,892	4,549	24,441
1998	19,647	4,902	24,549
1999	21,611	7,195	28,806
2000	21,550	7,978	29,528
2001	23,477	6,298	29,775
2002	24,292	6,295	30,587
2003	28,021	7,583	35,604
2004	35,898	10,752	46,650
2005	47,291	20,293	67,584
2006 (Q1-Q3)	47,190	31,554	78,744

Source: The Insolvency Service

Individual Voluntary Arrangement

An Individual Voluntary Arrangement (IVA) is a way of going bankrupt without actually going the whole hog. Essentially, you come to an agreement with all your creditors about how to pay off the debts. It's done under the supervision of a licensed Insolvency Practitioner (usually an accountant or lawyer) who usually does all the work with you and for you and, once in place, it has the force of law.

The good thing about an IVA is that it stops your creditors from knocking at your door and it enables you to have a great deal more control over how your assets are dealt with than you would with bankruptcy. It also does not affect your professional status, if you have one, although a note of the IVA will remain on your credit record for six years.

The bad thing is that it all costs money to implement -- and that's money that you could have used to pay off your debts. So you should certainly shop around for the cheapest offers when you're looking for an Insolvency Practitioner as fees vary considerably. Also note that, in the event that you default on making payments in accordance with the agreement, your Insolvency Practitioner is obliged to petition for your bankruptcy. So, if your debts are serious enough to go the IVA route, you need to follow it through properly!

An IVA usually lasts for between two and five years, depending on how long it takes you to pay off your creditors. You will be required to account for your spending and anytime you get a pay rise, the extra money has to go towards the debts. If you have equity in your home or an endowment policy then you may be required to use these to pay off part of your debts.

Your Insolvency Practitioner will help you to sort out what your assets and liabilities are, how much you need to live on and how you propose to deal with your creditors. He'll then help you to apply to the court for an Interim Order, which puts an immediate stop to creditors taking legal action against you. The Insolvency Practitioner then contacts all your creditors and outlines your payment proposals. This can either be done in writing or he can call a meeting of your creditors -- it depends entirely on the extent of your debts and the number of creditors involved.

Provided 75% (in value) of creditors agree to it (and they usually will since it means they'll at least get some money out of you) the IVA can then be implemented. The fees you pay to the Insolvency Practioner are normally taken out of the monthly payment you make to your creditors.

Many people have concerns with the way IVAs are being promoted to those in debt, particularly by the new breed of IVA firms that advertise heavily on TV and in the press. As these firms generate large fees from IVAs, there is obviously an incentive for them to recommend this solution when it may not be in the debtor's best interest (people on benefits being one example).

Note that there are moves to make the IVA process simpler, especially for those people who owe less than £30,000. However, the current system will be with us for a little while yet.

Bankruptcy

It goes without saying that this is truly a very last resort! Bankruptcy is a very serious matter and the fact is, it's probably not going to be up to you anyway. Although you can petition for bankruptcy yourself, if you're in that much trouble, it's more likely to be one of your creditors who will take this course of action against you.

Incredible as it may seem, creditors who are owed as little as £750 can make you legally bankrupt. It's unlikely for such a comparatively small sum, but it's worth remembering that the threat is there. In practice, if your total debts are less than £5,000 then you can apply to the court for an Administration Order instead. The court will then assess your financial situation and order you to pay off your debts, usually by monthly instalments.

It depends on the extent of the debts, of course, but if you're made bankrupt, you will probably lose just about everything apart from your pension. An Official Receiver or Insolvency Practitioner will be appointed to take over the management of your financial affairs. Effectively, it means he takes over everything you own and sells the lot to clear the debts. This will, quite possibly, include your home although he has just three years to reach an agreement on what happens to it.

If your debts exceed your assets, the only things you'll be allowed to keep will be some basic household items and any tools you need in order to work. If you have any income over and above what's necessary to live on, you will have to hand that over, too. And if you want to have a bank account, you have to tell them you're a bankrupt.

The good news is that, due to a recent change in the law, most bankrupts will now be automatically discharged after just one year and, in some cases, discharge could come even earlier. And although you are still liable for your debts for three years after being made bankrupt, after that the remaining debts are written off leaving the discharged bankrupt are free and clear to make a fresh start. Note however that you will still have to pay any student loans you took out.

Bankruptcy Restriction Orders can be imposed on those considered to have been dishonest, reckless or blameworthy. In these extreme cases, the orders can last for up to fifteen years and prevent people from getting credit of more than £500 without disclosing their status, acting as a director of a company, and trading under different names. Breaching such an order is a criminal offence.

It's worth noting that the above legal procedures are applicable in England, Wales and Northern Ireland only. There are similar mechanisms available in Scotland but the process is different. The equivalent of an IVA is known as a Trust Deed and bankruptcy is called Sequestration.