The Debt Advice Online Blog

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 organizations 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 undercharged. 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.
Stigma

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 www.insolvency.gov.uk, and will be recorded by credit reference agencies.

Length

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.

Credit

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.

Fees

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.

Protection

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.

Debt management program and a Scottish Church Deed are two separate things, and should not be confused with each other. The trust takes a more informal approach, and provides a conclusive step to let the creditor have his payments from his debtors over what-ever time it takes for the debtor to pay off his borrowings. This is a Protected Trust Deed, and is based on the proposal made by the debtor to re-pay the money that the debtor owes to his creditors.

Scottish Trust Deeds are applicable to the people living in Scotland, and this trust is taken to be an equivalent to the Individual Voluntary Arrangement (IVA). The trust is regulated by the bankruptcy act of Scotland formed in the year 1985. The Protected Trust provides a means to the debtor to pay off his loans, instead of facing seizure of property. The Trust applies to those debtors who are passing through bad financial crisis, and do not have enough disposable assets to liquidate his loans with. On signing the Trust Deed, all the loans as of that day are frozen and consolidated, after which a Trustee is appointed to look into the debtors re-payment matters. The appointed trustee then takes up the matter with the creditors, providing them with proposals in writing.

Scottish Trust Deed is a means to enable a debtor, who is suffering heavily from financial difficulties overwhelmed with unmanageable debts, to write a proposal for re-payment to his creditors. This proposal is distributed to all the concerned creditors, and in case the debtor owes no more than 1/3 of his total debt to any single creditor, vote to reject the proposal by any of the creditors becomes invalid. The Trust Deed then becomes legally binding to all the creditors who have been circulated with a copy of the proposal.

The Trust prepares a debt consolidation of all the debts of a debtor into a single debt, and provides a means for an affordable monthly re-payment over a period of 36 months. The debtor pays off his borrowing at the pro-rata rate as fixed by the Trust. The Trust itself goes into minute calculations in setting up such re-payment amount, after going into the details of the debtor’s financial matters, including his assets and liabilities. More-over, the trust looks into the debtor’s income, and the cost of living, and then works out an amount which the debtor is required to pay against the consolidated debt. The Trust especially looks into the affordability of the debtor in paying off the loan in the manner set out in the proposal. The debtor’s payment amount is so arranged, where the debtor has less possibility in being delinquent again, considering his commitments towards other priority payments, for example, his mortgage or rent, his car loan re-payments, utility and council tax payments, and more.

As and when the proposal is accepted by the creditors, the interest on the balance amount is stopped, and the amount gets fixed from that day onwards, with the creditors becoming legally bound by the Protected Trust. The debtor, on the other hand, has to maintain his part of the Protected Trust terms, and the final amount to be settled becomes the full and final settlement of the debt. If there is any outstanding balance, it has to be written off.

The debtor usually takes the help of a licensed Insolvency Practitioner known as a trustee, and this trustee could be the one appointed by the Protected Trust. The trustee has to perform with all honesty in preparing the draft bearing in mind the debtor and the creditors as well. The drafted proposal has to be realistic from both points of view, and should not be one sided. The draft is given to the debtor to be approved, and when done, the trustee makes the final trust proposal before circulating it to all the creditors.

When the Trust proposal is received by the creditors, they have the right to either accept or reject the proposal, or even ask for modifications and amendments before acceptance. Here again, the modifications and amendments, if any, could only be done with the debtor’s consent. If there are no replies received from the creditors, the proposal is deemed to have been accepted.

As the Trust Deed becomes protected, the appointed trustee acts as an observer, who looks into the progress of the deed and ensures the proper maintenance of the terms and conditions set in the Trust Deed. On successful completion of the payment, the debtor will be considered debt free. No matter what the amount was before, the sum settled in the deed would become the full and final settlement figure.
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