Bankruptcy Vs IVA Debt Consolidation

By: Alison Jenkins
When an individual declares bankruptcy, they surrender control of all their assets to a magistrate, who with the support of a panel, decides how best to use these assets to pay off their creditors. This means all the individuals assets, their home, their car, any capitol they have are all taken away from the applicant. As a bankrupt, all control over assets is relinquished. For this reason, bankruptcy has always had a certain stigma attached to it. Beyond the immediate financial costs of bankruptcy, there are some longer lasting implications. Future credit / mortgages will be difficult to obtain, and, a bankrupt cannot become the director of a company for a given period of time.

In return for handing over all assets, the debtor has the remaining portion of their debt (the part they cannot afford to pay) written off. Effectively, the debtor is left with nothing, however, this means they are at least "debt neutral" as opposed to being heavily indebted.

An alternative to bankruptcy is an IVA (Individual Voluntary Arrangement). With an IVA the debtor is allowed to retain control over their assets, such as their home. In an IVA, creditors are required to agree to write off the portion of the debt the applicant cannot afford. Only if 75% of the creditors (those owed 75% of the monies) agree to enter into an IVA can the process continue. If creditors do not agree, then, the debtor must pursue other avenues of debt management / personal insolvency.

Assuming the IVA is agreed, both the creditors and debtors are legally bound (UK Only) to the agreement. That is to say, the creditor cannot subsequently seek monies / debts that were written off as part of the agreement. The debtor on the other hand must agree to pay the agreed amount on time every month. Should the debtor default on payments, then the IVA may be considered forfeit, and, the debtor once more becomes liable for the full amount of the debt. After an agreed period (typically 3 to 5 years) the remaining portion of the debt is written off, and, the debtor is considered "debt free".

The advantage of an IVA for the debtor is that they are able to protect their assets, i.e. their home. Whilst they may still struggle regards future finance, there is less stigma to an IVA than there is to bankruptcy, and, being party to an IVA does not prohibit one from sitting on the board of directors of a company.

The advantage of an IVA for the creditor is that they are often able to recoup more of the debt than they would be able to if the debtor were to declare bankruptcy. It also avoids any further legal expense, ensuring an amicable resolution of the debt problem.

An IVA can only be arranged by a licensed insolvency practitioner (who must be a qualified accountant), again, only with the agreement of 75% of the creditors. IVA's are of course only suitable for those with high levels of unsecured debt, where their home cannot be repossessed by the creditor.

You can read more on IVA vs Debt Management at A1 Debt Solutions. Further information on bankruptcy and IVA's can be found in another discussion on IVA Vs Bankruptcy.