voluntary arrangement

Individual Voluntary Arrangement

In the UK, Individual Voluntary Arrangements (IVAs) are a formal alternative for individuals wishing to avoid bankruptcy.

The IVA was established by the Insolvency Act 1986 and constitutes a formal repayment proposal presented to a debtor's creditors via an Insolvency Practitioner. Usually (but not necessarily) the IVA compromises only the claims of unsecured creditors, leaving the rights of secured creditors largely unchanged.

An IVA is a contractual arrangement with creditors and can be as flexible as an individual's own circumstances; they can therefore be based on capital, income, third party payments or a combination of these.

Creditors take a decision at a creditors' meeting called to consider the IVA proposal. The return to creditors is often higher than they would receive in bankruptcy. A vote is taken - by value. More than 75% in value of those creditors who vote at the meeting by person or by proxy must agree in order for the arrangement to be approved. If any of those voting are 'associates' (usually business associates, friends and family) then a second count is taken and 50% of non-associated creditors must approve it.

In the UK, an increasing number of consumer debtors with overwhelming levels of debt are turning to specialist debt advice organisations that offer an alternative to bankruptcy via the use of an IVA.

An IVA is an alternative to bankruptcy, however they are not mutually exclusive. A person can propose an IVA after they have been made bankrupt. If an arrangement is approved post-bankruptcy then the debtor can apply to the Court for an annulment of the bankruptcy order - such IVAs can only be proposed whilst the bankrupt is undischarged. If an IVA is proposed after a bankruptcy order has been made, it is now also possible to nominate the Official Receiver to be the supervisor of the arrangement. The Arrangements offered by the Official Receiver are very restricted and have not proved very popular. This type of arrangement is called a Fast Track Voluntary Arrangement and is only suitable in certain cases.

In Scotland there is a similar procedure to the Individual Voluntary Arrangement called a Protected Trust Deed (PTD). The Trust Deed, although similar to the Individual Voluntary Arrangement in many ways, lasts only for 3 years as opposed to the normal 5 year period that constitutes the vast majority of IVAs. Trust Deeds are an alternative to bankruptcy in Scotland which is referred to as Sequestration.

Advantages and disadvantages

The advantages and disadvantages of an IVA compared with other debt solutions are particular to a debtor's individual circumstances and professional advice should be sought to decide on the best option.

An IVA is a private agreement between a debtor and creditors. Bankruptcy is advertised in a local newspaper and the London Gazette, an IVA is not. Both debtors in an IVA and bankrupts are listed publicly on the Personal Insolvency Register, and will be recorded by credit reference agencies.

An income based IVA can often last up to 5 years, although it can be any length. A bankrupt is normally automatically discharged after just 1 year (unless subject to a Bankruptcy Restriction Order) or benefiting from an early discharge. An Income Payments Agreement or Order in bankruptcy is will not last for more than three years and payments are generally much lower than under an income based IVA.

Unlike Bankruptcy, an IVA does not statutorily restrict a debtor from obtaining credit, although the proposal might do.

Ability to trade
Bankruptcy will usually dissolve a partnership and prevent a debtor from acting as a director of a company. A self-employed trader will have to disclose the fact that he or she is bankrupt when obtaining credit, for example when dealing with suppliers. There are no such implications with an IVA, although lenders often ask.

Credit rating
Although arguably an IVA is seen as more positive than bankruptcy in the eyes of creditors, as it shows a certain commitment to repaying debt, in reality an IVA is likely to have an equally detrimental effect on a debtor's credit rating as bankruptcy. Usually a debtor's credit rating is already poor before an IVA or bankruptcy is considered however. Both bankruptcy and an IVA will stay on a debtor's credit file for 6 years from the start of the IVA/bankruptcy.

An IVA is usually less expensive than bankruptcy as the Insolvency Practitioner need not deposit funds in the Insolvency Services Account as is the case in a bankruptcy - here the Government levies an ad valorem charge of 17% on all deposits after the first £2,000.

A major advantage of an IVA over debt management arrangements is that all unsecured creditors are bound by it once it has been agreed: even if they did not agree to the IVA at the meeting of creditors. As only those creditors who vote at the meeting are counted, those creditors who did not vote at all are still bound by the decision, as are those who voted against it if they are outvoted (see above). Creditors bound by the IVA cannot take enforcement action to recover the debt, but instead submit a claim in the IVA and are paid by the Supervisor.

The home
Perhaps the biggest advantage to an IVA over Bankruptcy is the control the debtor has over their home. In bankruptcy, the debtor's assets will vest in the Trustee (some assets are excluded, notably those used as tools of trade, ordinary household contents and a modest motor vehicle). This will usually include equity in their property and the Trustee may force its sale. An IVA proposal may exclude the property altogether, propose a re-mortgage or offer income based contributions for a longer period in lieu of the debtor's equitable interest in the property. The Supervisor may register a restriction on the property to ensure that his or her consent is required before the property is, for example, sold or re-mortgaged.

The roles of the Insolvency Practitioner

An IVA can only be administered by a Licensed Insolvency Practitioner. At each stage of the IVA process, the Insolvency Practitioner's role changes.

The advisor role will inform the debtor of all the solutions available, commonly including re-mortgage, consolidating debts into a loan, debt management, bankruptcy and IVA. The advisor should look at the debtor's circumstances and level of debt to advise the best solution.

If an IVA is considered appropriate, the Insolvency Practitioner will become the Nominee. The Nominee's role is to advise the debtor on drafting a proposal to the creditors. In practice, the proposal is generally a standard document which is modified to the each debtor's particular circumstance. Common terms will include:

An analysis of the debtor's income (A) and expenditure (B). From this, the debtor's disposable income is calculated (A)-(B) and this will become the amount that will be paid into the IVA periodically (usually monthly). The period is usually five years, but can be any length. The proposal will usually state that if the disposable income increases during the term of the IVA, the amount to be paid will also increase proportionately.

A background history explaining how the debtor's financial difficulties arose.

Details of any assets that are to be realised or excluded. For example, how the matrimonial home will be dealt with, pension schemes, share save schemes, vehicles, etc.

The ability to call future meetings of creditors in the event that circumstances change, to modify the terms of the IVA.

Restrictions on obtaining credit. This is because a debt incurred after the approval of the IVA could result in a bankruptcy petition from a creditor, which would almost certainly cause the IVA to fail.

The Chairman will hold the meeting of creditors and negotiate with the debtor and creditors to approve the proposal. It is common for creditors to ask for modifications to the proposal at the meeting. Common modifications put forward by major banks include restricting the debtor from obtaining credit, ensuring payments increase if the debtor's income increases, specifying a minimum return such as 40 pence in the pound, and insisting that the Supervisor fails the IVA if the debtor misses 3 or more payments and petitions for the debtor's bankruptcy.

If the IVA is approved, the Insolvency Practitioner becomes the Supervisor of the IVA. This involves reporting annually to the creditors, debtor and the court. It also involves montitoring that the debtor is complying with the terms of the arrangement, agreeing creditor claims, making payments to creditors and generally ensuring that the arrangement progresses in accordance with the terms of the proposal. The debtor must comply with all reasonable requests of the Supervisor, which may include periodically providing bank statements, accounts, wage slips etc.

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