FOOL SCHOOL
IVAs and Bankruptcy

January 23, 2004

Insolvency isn't much fun but sometimes it's the only alternative when you're confronted with a brick wall. However, it's not the end of the world. At the end of the day it's only money and, at least it'll mean you can make a fresh start once it's all over and done with. So, if you reckon you've tried every other possible course of action, then let's look at these final options.

Individual Voluntary Arrangement

The Individual Voluntary Arrangement is a way of going bankrupt without actually going the whole hog. You'll probably be allowed to keep the roof over your head, for instance.

An IVA is where 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. The bad thing is that it all costs money to implement -- and it'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: http://www.insolvency.co.uk/ip/index.htm.

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 on an annual basis and anytime you get a pay rise, the extra money has to go towards the 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, as your Supervisor, 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.

You might want to look at an extremely useful post from one Fool, Willwinorlose, who went through the process himself. He explains what it was like from a practical point of view here.

Please 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!

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. It's why an IVA is so much the better option. 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. 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! You have no choices at all. 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.

Usually, bankruptcy lasts for three years, after which you are automatically discharged and no longer liable for the debts incurred at the time you went bankrupt. Changes under the new Enterprise Act 2002, due to come into force by early 2004, will enable those who went bankrupt through no fault of their own to be discharged after 12 months. However, the court can refuse to discharge you if your financial conduct during the bankruptcy period has been poor. Best to keep on the right side of the law, eh?

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 IVA, for example, is known as a Trust Deed and bankruptcy is called Sequestration.

More on getting out of debt.