An Individual Voluntary Arrangement, or IVA, allows a debtor to avoid bankruptcy by coming to an agreement with creditors to pay off a percentage of his or her debts over a given period.

What happens

There are no hard and fast rules. Essentially, an IVA is a haggling process between the individual, his or her insolvency practitioner and creditors.

Generally, the debtor will pay a lump sum upfront to the creditors and the insolvency practitioner, followed by a series of monthly payments. Sometimes a meeting of creditors is held, in which case it is important for all creditors to be informed.

The repayments are calculated through an analysis of the debtor’s income and expenditure. Once agreed, the repayment programme forms part of a legally binding contract.

The individual taking out the IVA can apply to the court for an interim order that prevents creditors from proceeding with a bankruptcy petition while the order is in force.

However, the creditors can still force the debtor into bankruptcy if he or she does not meet the requirements of his or her side of the deal. There is one other catch: an IVA can go ahead only if creditors representing more than 75 per cent of the debt agree to the deal.

Advantages of an IVA

But for the debtor, an IVA offers many attractions. Perhaps most important is that it means that the debtor avoids the stigma and the severe penalties of bankruptcy.

For people whose careers could be put at risk by bankruptcy, such as lawyers and financial practitioners, an IVA is particularly attractive.

The arrangement gives the debtor more say in how assets are dealt with and avoids some of the fees and expenses payable in a bankruptcy.

The Government has its own interest in encouraging uptake. IVAs are dealt with by commercial insolvency practitioners rather than the office of the Official Receiver at the DTI, so the greater the uptake of these, the less pressure on the Government’s resources.

Popularity

While there are about 9,000 bankruptcies each quarter, only a tiny fraction of that figure enter into IVAs.

The reasons, says Nick Hood, senior partner at Begbies Traynor , the insolvency experts, are many. “Some individuals go straight to the court and file for bankruptcy without seeking the service of a professional insolvency practitioner, so they never hear about the alternatives.

Another problem has been the number of rogue practitioners who take a fee to set up agreements that are totally unrealistic. They have tarnished the reputation of the IVA.”

Cost

Cost is also a deterrent, with the fees often looking hefty compared with the debt owed. And, of course, the agreements are an option only for those with sufficient assets or an income stream that will allow them to make an offer to creditors.

Insolvency experts say that the Government must boost awareness and bring down the costs if it is to succeed in increasing uptake of the IVA as an alternative to bankruptcy.

Approach with caution

The key for those considering an IVA, Mr Hood says, is to take professional advice early. Reputable insolvency practitioners usually do not charge for initial advice.

R3, the insolvency association, warns anyone entering into an IVA not to agree to any deal that is not realistic and achievable. “It could still fail later and you might then face bankruptcy in two or three years’ time,” the association says.

R3 publishes a guide to IVAs, Is a Voluntary Arrangement Right For Me?, which is available on the website at www.r3.org.uk/publications. The DTI’s A Guide to Bankruptcy is available at www.insolvency.gov.uk.

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Five websites

The Insolvency Service

The UK insolvency helpline

Business Link

R3

Begbies Traynor

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