What is an Individual Voluntary Arrangement
An individual voluntary arrangement is used in the United Kingdom as an alternative to bankruptcy. The IVA was established in 1986 and is governed by Part VII of the Insolvency Act of that year and constitutes a repayment proposal by an insolvency practitioner. IVA's are contractual agreements between debtors and creditors and can be as flexible as the petitioner's situation allows. Due to this flexibility the repayment schedule can be based on a number of things including but not limited to: net income, capital, third party payments, or any combination of these. As with any financial arrangement however, there are benefits as well as disadvantages.
Pros and Cons of IVA's
Before entering into an IVA, or any other legally binding agreement, the debtor should consider the pros and cons. There are numerous advantages over bankruptcy with these contracts. First and foremost they are legally binding to both parties involved. Meaning that creditors can no longer make collection calls or take any further actions as long as the terms of the agreement are met. Also, they are considered a private matter so they are not printed in the press like legal matters including bankruptcy. These contracts are far less expensive than filing for bankruptcy through the legal system and accruing attorney fees and other costs. The restrictions imposed by bankruptcy are not an issue with individual voluntary arrangements and the proposals can be flexible based upon the debtors circumstances. With these arrangements there is no minimum or maximum level of debt required to file and likewise there is no minimum or maximum limit set on repayments except what creditors are willing to accept. IVA's give the debtor more control over how their assets are dealt with and how payments are set up with creditors. There are no restrictions regarding personal credit and creditors may be persuaded to allow some assets (such as one's home) to be retained.
Creditors work with these agreements because there are some benefits for them as well. They are more likely to receive a higher return with these arrangements than in the case of bankruptcy where they may receive nothing. The costs for these contracts is considerably lower leaving more income and capital for repayment than after an expensive bankruptcy suit. Finally, this is an insolvency procedure so debtors can still claim VAT and tax relief as bad debt.
There are some disadvantages to these contracts as well. If the debtor does not fully comply to the terms of the contract, creditors can take further collection and legal actions. Creditors cannot petition for the contracts and therefore debtors often wait until they are at a point where the voluntary arrangements are no longer available or beneficial to them. These contracts typically offer a higher repayment amount and a longer repayment term (typically five years as compared to three with bankruptcy)than bankruptcy. New arrangements cannot be applied for if one has been applied for in a given twelve month period and although there are no restrictions to personal credit approval they can be difficult to obtain as there are also disadvantages for creditors. Creditors may receive more actual monies but it takes longer to receive them and payments are typically smaller than with bankruptcy and there is no opportunity for the insolvency practitioner to investigate debtors for hidden assets and income as with bankruptcy proceedings.
How to apply for IVA's
The first step when applying for individual voluntary arrangements is to appoint an insolvency practitioner to oversee the contract and its proceedings and implementation. After this has been done, an interim order should be filed with the courts to prevent creditors from taking legal action. Next, the insolvency practitioner must ensure the agreement is viable and if so the practitioner will then report that a meeting of creditors is to be held to the courts. In this meeting the insolvency practitioner will try to balance the rights and responsibilities of the debtor with those of their creditors. Creditors will vote on the acceptance or denial of the proposal and if the majority vote for approval then all creditors notified of the proceedings are bound by the individual voluntary arrangement. Creditors are not required to approve the contract but if they do the insolvency practitioner will oversee compliance and repayment as per the contract.
IVA's were put in to place to aid businesses who were insolvent but wanted to continue with their business. The intent was to keep the business solvent in the short term with hopes of becoming profitable in the future with smaller debt payments over an extended period of time. However these agreements are not limited to businesses and in today's economy they are benefiting both businesses and individuals. If the circumstances are right and this is the right decision for an individual it is a viable alternative to bankruptcy.