Following the Enterprise Act of 2002, it is possible to be discharged from bankruptcy in less than 12 months, so to a lot of people, bankruptcy seems a soft option. But that is far from the case. In fact, bankruptcy is a situation that should be avoided wherever possible. For a start, there is the risk to assets that bankruptcy brings. On top of that, there are tough legal restrictions on business and financial activity.

For instance, during bankruptcy you cannot:

• Obtain credit of £250 or more without disclosing you are bankrupt.
• Act as a director of a company or start up, manage or promote a company without the consent of the court.
• Start a business in a different name from the one that the bankruptcy was filed for unless you inform everyone you do business with.
• Plus there is a stigma to going bankrupt and also public notices are placed in the press.

So it is clear bankruptcy is far from a soft option.

The IVA, on the other hand, is often a more suitable alternative for those with debts over £15,000 and a regular income.

An IVA works like this: first, an insolvency practitioner draws up a proposal and presents it to creditors at a special meeting.

If creditors representing 75% of the debt agree to the terms of the proposal, the IVA can go ahead. Depending on the terms of the agreement, an IVA can write off a large percentage of the debt. The rest is paid off in instalments over five years based on what the debtor can afford to pay. This way, someone with serious financial problems can be debt free in just five years.

What’s more, an IVA ceases or prevents any legal action taken against you, and the negative aspects, risks and restrictions of bankruptcy are avoided, providing the agreement is adhered to.

So anyone staring personal bankruptcy in the face should consider all their options before making any declarations.

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If an individual cannot meet their existing repayments, it may not be possible for them to pay off the consolidation loan, even if this loan is spread over a longer period, or charges a lower rate of interest.

Often, debt consolidation is used as a form of debt management, i.e. it helps the debtor manage and organise their money / debt more effectively. A common sales line offered by companies marketing debt consolidation loans is that they (the debtor) will have a single, easy to manage monthly payment.

For those that are beyond the point of being able to service a debt consolidation loan, personal insolvency may be the only option left open to them. Personal insolvency can be a painful and difficult process. Personal insolvency or bankruptcy also has a stigma attached to it which deters many from applying at an earlier stage.

When an individual declares bankruptcy, all assets are put under the control of a magistrate, who then, along with a panel decides how best to use these assets in order to pay off 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.

Declaring bankruptcy has longer lasting implications also, for example 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.

An alternative to bankruptcy is an IVA (Individual Voluntary Arrangement). With an IVA the applicant retains control of many of their assets, most importantly their home. In an IVA, creditors agree to write off the portion of the debt that the applicant cannot afford to pay. If 75% of the creditors (those holding 75% of the debt) agree to the drafting of an IVA, the process may continue. If not, the debtor must revert to debt management, or bankruptcy.

Once the IVA is agreed, both parties are legally bound (UK Only) to the agreement. That is to say, the creditor cannot subsequently seek compensation / further repayment of debts it has agreed to write off. The creditor on the other hand must agree to pay the agreed amount on time every month. 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. The advantage 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 or simply fail to pay.

IVAs are of course only suitable for those with high levels of unsecured debt, where their home cannot be repossessed by the creditor.

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When the IVA was first launched by the Government in 1986 its main purpose was an alternative to bankruptcy for business people. However changes in the economy along with increased consumer spending trends and reliance on easily available credit pushed personal debt sky high. As a direct result, the use of the IVA became increasingly popular with consumers as well as business people.

Due to the recent demand for the use of the IVA by private individuals, which has been further increased by heavy marketing on TV and in the press the government has had to rethink the IVA process as a whole. They were tasked with developing an alternative, which are better-suited for consumer applicants. The suggested solution is to keep the existing style IVA for use amongst business applicants and introduce a brand new 2 tier IVA to consumers.

The new IVA process will now be known as the SIVA or Simple IVA. The main differences between both types of IVA are determined in the individual’s level of debt criteria. To qualify for the 1st tier, or SIVA, consumer applicants will need to have a total of unsecured debt of £25,000 or less. An SIVA 2 will require consumer applicants to be in debt by more than £25,000 but less the debt ceiling of £75,000.

The other major difference is the way in which the proposal is approved. The current IVA condition stipulates that at least 75% of all creditors must vote in favour of the IVA proposal. With the new SIVA 1 this is no longer a pre-requisite, so long as the individual can be identified as a potential bankruptcy candidate. With an SIVA 2, the voting process will still form the basis of approval, however only 51 % (as opposed to 75%) will need to be in favour.

The start of the new IVA schemes have yet to be formally announced but it is highly likely that they will start in Q3 of 2007.

Summary

This change in legislation will not have any real difference in the initial start of the IVA process, but rather it concentrates on the amount of debt the applicant owes its creditors. Once the IVA scheme is active, an applicant will qualify for the most appropriate SIVA stage and the new term IVA will by default refer to the new IVA process.

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Although the IVA – or Individual Voluntary Arrangement – is not for everyone, it can provide some people with an effective and efficient solution to their debt management problems.

Over the past couple of years companies that deal with IVAs have been engaging in more advertising, and this has resulted in increased awareness about this debt solution amongst consumers and subsequently in increased interest in this solution.

An IVA or individual Voluntary Arrangement is a solution that could help many people in debt, and many of these borrowers may be able to escape the harshness of bankruptcy by opting for an IVA instead. The IVA has become known as a softer alternative to bankruptcy, and gives those in deep debt the chance to get out of debt far more quickly.

There are specialist firms that deal with IVAs and debt charities can also offer more information on this process if you are interested in opting for the IVA route. However, you will only be eligible for an IVA if you meet the set criteria required for this process. Part of the requirements to qualify for an IVA include having unsecured debts of at least £15,000 with a range of creditors, and also being in full time employment.

You should not assume that an IVA is an easy way to escape your debt, as it is a long winded process, can have a profound impact on your financial future and is a legally binding process. You should also consider the benefits of entering into an IVA when making your decision. Some of the benefits that come with an IVA is being able to get rid of all of your unsecured debt in as little as five years, having much of the debt written off where appropriate, and being able to make just one, affordable repayment towards all of your unsecured debts each month, which can easy your financial situation.

With an IVA, your single monthly repayment is distributed between the various creditors on a pro rata basis, based on the amount that you owe to each lender, and these repayments usually continue for a period of five years. At the end of the five year term any outstanding balance is usually written off, and you can enjoy being debt free. However, you must ensure that you stick to the terms of the IVA and keep up with repayments over the five year term.

There are various other debt solutions that you can opt for if you do not want to go for an IVA, and this includes debt management plans, consolidation, or informal arrangements with your creditors.

Alisdair Cosgrove is an expert in the field of personal finance in the UK and has been writing articles on the web for many years. You can find more of his information at the UK site Glitec.co.uk, offering online loans and great deals on IVAs. Visit Glitec.co.uk today for a great mortgage and loan offer and to read more articles from Alisdair.

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A company voluntary arrangement is a vehicle which allows the company to offer a settlement to its creditors. The company pays back a percentage of its debt over a fixed period – often 3-5 years. The creditors agree to accept the reduced payments in full settlement of the debt that they are owed.

Why Would The Creditors Do This?

Creditors have the possibility of receiving some return on what they are owed which they would almost certainly lose if the business was wound up. They also have the opportunity of continuing to trade with the business into the future. There are significant advantages for the company if a company voluntary arrangement can be agreed. The company structure and employees are maintained. This means important resources are not lost as they might be if the business was put into administration or went through a pre-pack liquidation. The company is also left in a much better trading position as the burden of its legacy debts is lifted.

There are a number of steps that will need to be carried out if you feel that a company voluntary arrangement is the correct course of action for your business:

• Get a corporate insolvency expert to review with the directors the current business situation. The insolvency expert will want to establish that the company is insolvent and that a CVA is the most appropriate option. If in agreement with the plan, the directors must approve the action with a board resolution.
• An Insolvency Practitioner is introduced to act as a nominee for the CVA. The insolvency practitioner will have the responsibility to preparing the CVA proposal. This will include business forecasts showing how the payment proposal to creditors will be sustained.
• Often the company’s bank is a significant creditor so the Insolvency Practitioner will have to meet with the bank to gain commitment that the company voluntary arrangement will be approved and that they will continue to support the company with banking facilities through the arrangement.
• The final version of the CVA proposal and nominee’s report is filed at court and distributed to all creditors. A meeting of creditors will be called a minimum of 14 days (normally 21) after the issue of the proposal documentation.
• The CVA is accepted at the creditors meeting only if 75% of the value of creditors who vote accept the proposal. The acceptance of 50% of the company’s shareholders is also required.

Once a company voluntary arrangement has been accepted, the directors have their work cut out to make sure that the company flourishes and the terms of the arrangement are maintained. Very often it is advisable to consider a management change which will be able to bring new ideas and energy to the company. This may not necessarily mean a significant cull of the current executives. However, at the very least a new non executive director should be introduced. The business may also require new capital to invest in new business development projects. The company insolvency expert will be able to advise about this.

The fees associated with carrying out a company voluntary arrangement will normally consist of an initial fee charged by the company insolvency expert. Additional Nominee and Supervisors fees will be charged by the insolvency practitioner. However, these will generally be taken from the ongoing payments that the company makes into the CVA. As such, the company will not have to pay these additional fees over and above what it is already paying to the CVA.

Derek Cooper is Managing Director of Cooper Matthews Limited.

More details about CVAs at coopermatthews.com/company-voluntary-arrangement.html

Cooper Matthews specialise in Business Refinancing and Business Recovery Services Advice providing practical insolvency advice for businesses with financial problems to turn your business around. They have significant experience in working with small to medium sized businesses.

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As with any major financial decision, it’s important to understand what an IVA involves, and what the consequences are if you fail to keep up on the agreement. Here is a quick guide to how an IVA works.

How An IVA Works: Step-By-Step

1. Speak to a debt adviser

Before you can apply for an IVA, you will need to speak to a professional debt adviser or an Insolvency Practitioner to discuss your situation. It may be that another debt solution is more appropriate for your circumstances – a good debt adviser can let you know whether this is the case.

If your debt adviser thinks an IVA is your best option, they will refer your case to an Insolvency Practitioner, who will work with you to draw up your IVA proposal. This details how much you are able to pay towards each of your debts, based on how much you can afford after your essential costs have been covered.

2. The IVA proposal is sent to your creditors

Your creditors will be invited to approve the IVA proposal. This gives your creditors the opportunity to ‘vote’ either for or against the IVA terms. For the IVA to go ahead, creditors accounting for 75% of the total debt must approve the IVA.

3. The IVA begins

If your creditors approve the terms, then the IVA can begin. You will make a single monthly payment to your Insolvency Practitioner, who will be responsible for distributing the agreed amounts between your creditors on a pro rata basis (based on what proportion of your total debt is owed to each). This will normally continue for five years.

Since an IVA is a legally-binding agreement, both you and your creditors must abide by the terms: you must keep up your payments for the duration of the agreement, while your creditors cannot pursue any further action against your debts. Interest on your debts is frozen, meaning they cannot continue to grow.

4. Equity release in final year

If you are a homeowner, you may be expected to release some of the equity in your home in the 54th month (half way through the final year) of your IVA.

5. 60 months – the IVA is complete

Once you have made your final payment (usually in the 60th month, but this depends on your terms), the IVA will be complete. Any remaining unsecured debt (in relation to the IVA) will be considered written off, leaving you to get on with your life as normal.

However, be aware that an IVA remains on your credit report for six years after it begins – so even once your terms have finished, the IVA will be recorded for a further year. This will make it more difficult to obtain credit until this period has expired.

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This process generally takes up to 8 weeks to complete.

During this ‘setting up’ period, the client is not actually protected by the Individual Voluntary Arrangement (IVA) agreement.

The IVA will only become legally binding when the creditors at the ‘Creditors meeting’ have agreed it.

Therefore, in extreme cases, it is possible that creditors will attempt to commence legal action against the debtor prior to the IVA creditors meeting.

Faced with this situation the client has the option of applying for an ‘Interim Order’.

An Interim Order is a court order and is applied for at the client’s local County Court, and when the Interim Order is lodged in court, the client is protected from legal action by the creditors, for a set time period, usually beyond the date of the IVA creditors meeting.

When the Interim Order is in force, the IVA process can continue towards the creditors meeting without the threat of a particular hostile creditor.

There is a court fee of approximately £150 for each proposal, i.e. an Interim Order application for a joint IVA would be £300 and therefore should only be applied for when there is a threat of legal action being taken against the client.

Up until 2005 Interim Orders had to be applied for in nearly every IVA case as a matter of routine. However as Interim Orders take a while to put in place they have now diminished to the point where they are not normally required. There is an exception to this; where there are aggressive creditors taking legal action up to and including a bankruptcy petition. Where a debtor, usually on the advice of his IP, believes that such a creditor petition is not in the best interests of all the creditors then an Interim Order request can be presented to the court to stop all actions for a specific period of time.

The court must be satisfied that the debtor:

• Has a suitably qualified IP to act for him/her
• Reasonably intends to make an IVA proposal to creditors
• Is an undischarged bankrupt or was able to petition for bankruptcy
• Had not made an Interim Order request within the previous 12 months

Interim Orders are usually designed to last for a period of 2-4 weeks so an IP and debtor need to work very quickly to get IVA proposals before the Court (in an attempt to get a bankruptcy annulled) or to all creditors to gain overall approval for the IVA.

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There’s no doubt that IVAs can be effective in reducing debts but they’re certainly something that you need to go into with your eyes wide open.

When you go into an IVA you essentially agree to make reduced (but fixed) payments to your creditors for a certain period (often over 5 years). At the end of this period any excess debt is written off.

There are other advantages as well including:

• The freezing of all interest and charges
• The fact that your creditors can’t chase you for your debts
• As long as 75% of your creditors agree to the IVA the other 25% will be legally bound to accept it

The main benefit is the fact that you can write off part of your debts. Usually this will reduce your debts by a maximum of 75%. This though is more like a best case scenario. The worst case scenario is that only 25% of the debt is written off. Most people end up somewhere in the middle. Most people would be looking to expect 40-50% of their debt written off, which is still a sizeable sum.

You’ll have to also take into account the fees for the insolvency practitioner, which can easily be around £6,000-£7,000.

In terms of your monthly payments these will be set at a minimum of £200 per month so if you can’t afford this don’t bother with the IVA arrangement.

The IVA though should be viewed as a last resort. If you can remortgage your house do this first. Similarly if you can reach an informal arrangement with them of make them an informal offer for full and final settlement – do this. You would be looking at a 25% write off without an IVA in place in any case if you offered to make a settlement payment.

If you do opt for the IVA and have a UK house with some equity left in it (less and less likely these days!) you’ll be expected to remortgage it anyway near the end of the IVA arrangement. In this case if the equity is significant you could end up paying all your debts in full in any case.

So whilst an IVA is certainly a good option for many you should ensure you look into it closely and take detailed advice before committing yourself to anything.

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However, in the last few years, IVAs have become a more popular way to clear debt problems. Creditors have streamlined the whole IVA process, and consumer debt cases in particular, no longer consider it necessary for the debtor to attend in person.

While this does mean that debtors are unlikely to face a creditors’ interrogation, they shouldn’t think that they have got off lightly. Mainstream consumer lenders have seen thousands of IVA proposals, and they know how much people need to live on, particularly when it comes to expenditures such as the monthly food bill. They will certainly expect the Insolvency Practitioner to have verified the debtor’s earnings and his expenditure on essentials such as mortgage or rent, Council tax and utility bills and to let them know he has done so.

When a creditor receives an IVA proposal, they will record the receipt of the proposal and then pass the papers to a specialist IVA department, which is usually within a large national firm of accountants, who vote on their behalf. The accountants then collate claims from their various creditor clients to submit their votes en mass – usually on the day before the meeting. The voting instructions together along with claim documentation will be faxed to the Insolvency Practitioner, arranging the IVA to arrive prior to the meeting. Creditors can then vote according to the size of their unsecured debts. For an IVA proposal to be approved, a 75% majority of voting creditors must be achieved. One creditor, at least, must vote in favour, and the majority is calculated only from actual votes cast at or before the meeting time. Creditors who have not voted by that time are deemed to have abstained, although they could still vote at any adjournment of the meeting.

If creditors do vote, they can either accept the proposal as is, reject it outright, or accept it subject to some modifications which will typically require an increase in the payment rate or minimum level of dividend to be achieved over the full term of the IVA.

At the meeting, or by telephone if the debtor is not present, the IP will explain to the debtor the consequences of any modifications that have been put forward by the creditors. The debtor can either accept the modifications, reject them, or put forward a compromise offer. If a modification is not accepted, this will count as a rejection vote from that particular creditor. The debtor does not need to accept all the modifications. Even when rejecting one or more creditors’ votes, the 75% majority can still be achieved. If a compromise offer is put forward, then the meeting will be adjourned while the IP writes back to the creditors with the compromise offer. Creditors can choose to vote again at the adjourned meeting with possibly further modifications, or their original votes will stand. The meeting can be adjourned for a maximum of 14 days from the original date, by then the debtor must have accepted sufficient creditors’ votes, including those with modifications, to achieve the 75% majority to enable the IVA to go ahead.

Conclusion

Although having to go through an IVA as a means to debt relief the process is now planned to try and make it as ‘painless’ for all concerned. So, try not to stress about the Creditors’ meeting. After all, the outcome of this will only help you in sorting out your debts once and for all so there is no need to worry.

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An IVA is an Individual Voluntary Arrangement, and was originally introduced as an alternative to bankruptcy. There are a few fundamental points about IVAs that you need to understand before taking the time to go through the IVA application process. First and foremost is that they are only available in the UK, so people based in any other country cannot get one. For US citizens the nearest equivalent will be debt settlement, which achieves similar end results. IVAs are not available in Scotland because of different laws, but there is a direct equivalent called a Trust Deed, which some IVA specialists also provide.

You must have at least £15,000 worth of unsecured debt for your IVA application to be approved. This debt has to be to three or more creditors and must be for what are known as unsecured debts. This means you cannot include secured debts such as a mortgage on your house, and neither can you include things like tax arrears.

When you set up an individual voluntary agreement you are agreeing to a legal contract, part of which is to make a fixed monthly payment towards your debts. For this reason, you must have a source of income that will leave you enough spare to make this payment. The IVA specialist will confirm this when they go through your finances with you as part of the IVA application process.

IVAs are intended to deal with very serious debt situations in a way that enables you to avoid the more drastic step of declaring bankruptcy. However, you can still do an IVA application even if you are already subject to a bankruptcy order. If the application is successful, the bankruptcy will be annulled.

If you are accepted for an individual voluntary arrangement, the provider will set up negotiations with your creditors to try to get their agreement to it. Because it is a legally binding process, you just need to have 75% of the creditors in agreement for the remainder to be bound by the terms of the IVA too.

You will then stop paying your creditors and make a fixed payment through the provider instead, who will then share it among your creditors. After a fixed period, usually not more than five years, your remaining debts are written off and you are debt free.

If you feel that an IVA application could be the right course of action for you, the most important thing to do is ensure you only talk to reputable and dependable companies about setting it up. All companies are not the same, and some will try to steer you towards whatever solution will make them money, rather than what will get rid of your debt.

The safest way to go about finding the best IVA company is to follow recommendations for only the most well established and reputable companies, then apply to a few of them. You are under no obligation to accept any offer they make to you, so this will allow you to compare offers and find a company you feel happy to work with. With all the best companies you should be able to start your IVA application by a simple and quick online form.

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