The Individual Voluntary Arrangement is the alternative to bankruptcy. But creditors are beginning to make it harder to apply for one.
Banks are taking a tougher stance with applications for Individual Voluntary Arrangements (IVAs) following massive increases in the amount of money they have had to write off as more people default on their debts.
An IVA is an arrangement between debtors and their creditors to repay a percentage of the debt over the life of the IVA - usually 5 years. It's done under the supervision of an insolvency practitioner and at the end of the IVA any outstanding debt is usually written off.
They're usually only suitable if the debtor has unsecured debts of at least £15,000 and in order for an IVA to be accepted, 75% (in value) of creditors must vote to accept it. The advantage to them is that they usually get back more than they would have had the debtor gone bankrupt.
In return, the debtor does not suffer the same restrictions imposed on bankrupts and pays a single monthly sum. That payment is determined by how much he/she can reasonably afford to pay after his/her normal cost of living expenses have been deducted from income. Often an Insolvency Practitioner can negotiate as much as a 75% reduction in how much the debtor owes.
However, some banks have been cracking down by refusing to agree to an IVA unless the debtor pays at least 40 pence or more in the pound. As a result debtors are being pushed into bankruptcy or debt managment plans. The latter are informal agreements that are attractive in some ways, but there are no legal restrictions on their length (unlike IVAs), so debtors could be shackled to their creditors for a very long period.
In the last three months of 2006, there were 17,063 bankruptcies, an increase of nearly 25% on the corresponding quarter of the previous year, and 12,741 IVAs, an increase of almost 82% on the same quarter of the previous year.
IVAs are tough enough as it is -- around a quarter of debtors who sign up for them fail to sustain their payments for the full five years and end up going bankrupt anyway. If the banks make it even harder for people to sustain payments, the number of IVAs being entered into might fall but bankruptcies could rise even more. Creditors could find their hard-line stance is equivalent to shooting themselves in the foot.
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