Those struggling with serious debts are able to choose between two main debt solutions: personal bankruptcy and an Individual Voluntary Arrangement. Both debt solutions result in a debt write-off, although the negative effects and percentage of debt written-off vary considerably.
What is an Individual Voluntary Arrangement?
An Individual Voluntary Arrangement is an agreement between a debtor and his creditors to write-off debt. How much debt can be written off is a matter of some conjecture, but it can be close to 75% for a small percentage of insolvents. Unlike a debt management plan, an IVA is legally binding on all creditors. The term of an IVA is normally 5 years and involves a pre-agreed monthly payment for the duration.
An Individual Voluntary Arrangement Prevents Creditor Harassment
Due to it being legally binding, it is against the law for a creditor to pursue someone for debts once they enter an Individual Voluntary Arrangement or declare personal bankruptcy. Should any creditor harassment occur, this should be reported to the Insolvency Practitioner immediately as it can be stopped.
An IVA Protects the Family Home
Unlike personal bankruptcy, an Individual Voluntary Arrangement serves to exclude the family home from the agreement. This means that someone with serious debts, such as credit card debt and unsecured loans, can continue to live in their home.
However, there is a clause drawn into almost all Individual Voluntary Arrangements that requires the insolvent to get a remortgage at the end of year 4. The terms of the IVA require that a remortgage be taken out for up to 80% of available equity although this will be based on affordability.
Professional Occupations and the Individual Voluntary Arrangement
Declaring personal bankruptcy would lead to the loss of a professional occupation. Those affected include: accountants, solicitors, government officials and financial advisors. It is believed that an Individual Voluntary Arrangement allows someone to maintain their professional status, although this is arguable.
Personal Bankruptcy and Money Lost through Speculation
Those who have lost money they have gained from unsecured loans, personal overdrafts and credit cards may find that they are affected by a Bankruptcy Restriction Order (BRO). This can mean that a bankrupt isn’t discharged for up to 15 years if he has been involved in stock trading or gambling. An IVA isn’t nearly as intrusive and doesn’t place further restrictions on an insolvent.
The IVA and Anonymity
Unlike personal bankruptcy, an IVA doesn’t result in an insolvency being published in the local newspaper and the London Gazette. An Individual Voluntary Arrangement is placed on a publicly available insolvency register, but few people tend to look at it.
An Individual Voluntary Arrangement is a suitable debt solution for those who have serious debts and are a home owner. Whilst it can help someone become debt free in 5 years, it isn’t suitable for everyone. Those with more modest financial difficulties should consider an alternative debt solution, such as a debt management plan.