How to avoid bankruptcy with an IVA

Getting into debt can be an extremely stressful business at the best of times and if you do, it’s understandable that you might quickly get confused with the many so-called ‘money solutions’ on offer, ranging from debt management companies right through to insolvency and bankruptcy.

If you owe a substantial amount of money then your creditors (the persons to whom you owe the debt) might well threaten bankruptcy and suggestions of this nature certainly shouldn’t be ignored.  In fact, it’s always best to seek professional advice as early as possible whilst also engaging in positive negotiations with the creditor to see if the matter can be resolved using other channels, such as debt management plans or even an Individual Voluntary Arrangement (“IVA”).  Whilst it might well be tempting to simply ‘bury your head in the sand’, it’s always advisable to stay positive, attempt to negotiate and get the best professional advice as soon as you possibly can.

What is an IVA?

An IVA can certainly be a useful tool when it comes to repaying debts since it’s a formal and legally binding agreement which is drawn up between you and your creditor(s).

If you’re thinking about entering into an IVA then you should first speak with a licensed practitioner for more advice and to make sure that it’s the best option for you going forward.  Remember, unlike a debt management plan, an IVA is legally binding and therefore shouldn’t be entered into lightly, or without having taken impartial, professional advice.

In essence then, an IVA has many advantages (not least of all because once it’s entered into, your creditor can no longer pursue the debt outside of the arrangement) but on the downside, they can be expensive to enter into.  Fees in the region of £5k certainly aren’t uncommon, although it must be remembered that the cost of this can usually be incorporated into your monthly repayment – so, for most, it still remains a better option than being made bankrupt (which can have much more serious consequences).  What’s more, an IVA can also be an effective tool for certain professions against whom bankruptcy could result in loss of employment (for example, solicitors, police officers, members of the armed forces and some banking roles).

What are the main disadvantages of being made bankrupt?

If you’re made bankrupt (whether voluntarily or through a creditor enforcing bankruptcy against you) then you could quickly face a number of serious consequences including (but certainly not limited to) the following:

  • Any bank accounts being frozen for a set period of time;
  • All finances (and control of finances) being handed over to an official receiver;
  • Not being able to borrow more than £500 without declaring to the lender you’ve been made bankrupt;
  • Not being able to act as a company director without the Court’s permission (this can be particularly devastating if you’re already self-employed and have a limited company since this could also cause reputational damage, of course)
  • The prospect of having to live on a restricted living expenses budget
  • Loss of assets (including any vehicles, even including your home if the equity in it is worth £1k or more)

How can I avoid bankruptcy with an IVA?

Whilst bankruptcy is often seen by some as ‘an easy way out’ (primarily due to the fact that it effectively wipes out what you owe in just 12 months) the long term effects of bankruptcy and be devastating and if possible, should be avoided.

An IVA, as we’ve already seen, is a legally binding agreement and can be a much simpler alternative to bankruptcy; particularly given that any monthly repayments can be proposed to creditors based purely on your disposable income (which will be evidenced by your advisor).  Ultimately this means that you won’t have to find extra cash or worry about meeting different monthly amounts (as you may have done before).  Once an amount has been agreed, set and approved by the Court then that’s all you have to pay – and not a penny more.

To enter into an IVA you need to consult a licensed practitioner for further advice and they’ll talk you through the whole process – from the initial data gathering stage, right through to an application being made with the Court for an interim order.  Once this has been put into place then your creditors can’t contact you for the purpose of chasing the debt; nor can they apply any further charges (such as additional interest) or increase the outstanding amount.  There are therefore numerous benefits and, above all else, this can often mean that a good percentage of your debts are simply written off at the end of the repayment term, which is usually five years.

What happens at the end of the IVA period?

Once your IVA period has finished then you’ll no longer be responsible for any further payments to your creditors and you’ll receive a ‘completion certificate’ from your advisor, which can be shown to future lenders.  These are particularly useful since they not only demonstrate that you’re now ‘debt free’ but also that you’ve taken your debt responsibility and done something positive about it.

Once three months has lapsed from the end of your IVA period, the record of it will also be removed from the Insolvency Register.

Where can I get more advice on avoiding bankruptcy through an IVA?

In order to enter into an IVA then you must consult a regulated insolvency practitioner.  These are usually qualified solicitors or accountants.  You can find an authorized person on the Insolvency Service website – www.insolvencydirect.bis.gov.

Most insolvency practitioners will offer a free introductory meeting to talk you through the process and also give you a better idea of how much it might cost to enter into an IVA.

Whilst the administration costs of an IVA are certainly quite high, many individuals find that the benefits of avoiding bankruptcy are by far more than worth it in terms of cost but again, this will depend on your individual circumstances, so always be sure to seek professional advice before committing either way.