Individual Voluntary Arrangements (“IVA’s”)
What is an IVA?
An IVA is formal individual insolvency procedure and may be an alternative to bankruptcy. It is governed by Part VIII of the IA 1986.
An IVA is an agreement between the debtor and their unsecured creditors for a composition of their debts or a scheme of arrangement of their affairs. It is essentially contractual in nature and allows the debtor to either:
- Settle their outstanding debts by paying a proportion of them to their creditors, or
- Come to an arrangement with their creditors over the payment of their debts, perhaps with the debtor’s assets being held or controlled in a trust for the creditors as beneficiaries.
An authorised professional, usually an insolvency practitioner (“IP”), supervises the debtor’s implementation and compliance with the terms of their IVA.
An IVA is a flexible procedure which can be tailored to the debtor’s circumstances. It will usually require the debtor to make funds available out of their assets (an asset-based IVA), income (an income-based IVA) or both. A third party, such as a family member or spouse, may also contribute to the funds available for the creditors (which would otherwise be unavailable if the debtor was made bankrupt).
In small consumer debt cases, the arrangement may simply involve monthly payments to the supervisor from the debtor’s income.
If approved by creditors holding 75% or more of the debt, an IVA binds the debtor and all of their creditors to accept the terms of the IVA in settlement of their debts. The rights of secured creditors, such as mortgagees, cannot be affected without their consent, and they will usually remain outside the IVA.
An IVA can last for any length of time but a period of three to five years is common in practice (known as the term). At the end of the IVA, if the debtor’s payments into the IVA are not enough to pay all of their IVA debts in full, the shortfall will usually be written off by the creditors.
Advantages of an IVA
For the debtor
- An effective alternative to bankruptcy proceedings.
- Protection against impatient creditors: as well as an interim order, an IVA binds all creditors.
- Enables a sole trader or partnership to continue trading to generate income for paying creditors.
- Flexible proposals are drawn up by the debtor to accommodate their personal circumstances.
- Avoids the stigma, restrictions and effects of bankruptcy, such as not being able to act as a director of a limited company or applying for personal credit. (However, in practice, credit may prove more difficult to obtain once an IVA is in place).
For the creditor
- The costs of administering an IVA are considerably lower than a bankruptcy estate.
- Potentially higher return, as dividend.
- Tax and VAT bad debt relief may still be claimed.
Disadvantages of an IVA
Most of the disadvantages associated with an IVA affect the debtor, including:
- Public: The IVA is entered on a public insolvency register.
- Duration: where contributions from income are made, an IVA is generally expected to last for a much longer period than bankruptcy.
- Change of circumstances: if the debtor’s circumstances change and the creditors reject amended terms, the IVA is likely to fail. The debtor will still owe the creditors the full amount of what they owed at the start of the IVA (less whatever has been paid to them under the IVA).
- Expense: an IVA can be expensive and there are inherent risks to consider.
- Home at risk if IVA fails: if the debtor fails to comply with the terms of their IVA, their home and personal assets may still be at risk. On an IVA failure, the debtor may be made bankrupt on a petition presented by their supervisor or a creditor.
- Credit score: the debtor’s credit rating can be affected for up to seven years.
Decision approving IVA
A decision approving a proposal or a modification is made when 75% or more (by value) of the creditors voting on the decision respond in favour. A decision is not made if more than 50% (by value) of creditors who are not associates of the debtor vote against it.
What if the debtor breaches the terms of their IVA?
If the debtor defaults on their IVA obligations (perhaps by failing to make payments on time or at all), the supervisor is usually required under the terms of the IVA to issue a certificate of termination to the debtor and present a bankruptcy petition against them (notifying creditors of the same).
Debt Relief Orders (“DRO’s”)
What is a DRO?
A DRO is an alternative to bankruptcy: it provides a way for a debtor, with assets totalling very little by value and with virtually no income over and above their domestic needs, to obtain release from their debts.
DROs are governed by Part VIIA of the IA 1986 and provide the debtor with a year’s protection from their creditors taking steps to enforce their debts without court permission. At the end of a year, the debtor is discharged from their liability for those debts.
A DRO does not lead to the realisation of assets or distribution of assets to creditors and, as such, may be suitable for people who do not own their own home, have little surplus income and assets and less than £20,000 of debt.
The benefit of a DRO is that it does not involve the courts; a DRO is administered by the IS in partnership with competent authorities (intermediary debt advisers).
Who can apply for a debt relief order?
A debtor is eligible to apply for a DRO if the following conditions are satisfied:
- Is unable to pay their debts;
- Has total debts of less than £20,000;
- Has total assets of less than £1,000;
- Has a disposable monthly income of less than £50;
- Is domiciled in England and Wales or has, in the last three years, lived or carried on business in England and Wales;
- Is not subject to any other formal insolvency procedure at the time of the application; and
Has not had the benefit of a DRO in the six years before the determination of their application.
For advice please contact our Bankruptcy & Insolvency team on 0345 20 73 72 8 or email firstname.lastname@example.org