A UK Alternative to Bankruptcy
When you hear about people who are really badly in debt, the way out that most people think of is to declare bankruptcy, but this can have severe consequences for your financial history.
In the UK, for those people who have more than £10,000 worth of debt, there is an alternative to bankruptcy, and it’s called an individual voluntary arrangement or IVA. This is a formal agreement between the person in debt and their creditors.
The agreement states what payments you will make to the people and organisations you are in debt to. Usually these are reduced monthly amounts to help pay off a percentage of what you owe. IVAs usually run for a period of five years, at the end of which you should have paid off your debts.
An IVA requires the involvement of a licensed professional to set it up as it’s a formal agreement. Usually this will be a debt management company where an advisor will assess your current financial situation and work out a reasonable repayment period. An interim court order prevents creditors from taking out legal action against you.
Creditors attend a meeting with you and the debt management company and vote to agree or decline the IVA. In value terms, 75% of those creditors you are in debt to, need to vote for the IVA for it to be approved. For lenders, an IVA is preferable to bankruptcy as it is established more quickly and they will usually recover more via an IVA than a bankruptcy.
An IVA is legally binding and as long as you keep up the repayments, you will be free of the debts at the end of the term – no matter if there are still debts outstanding. However, during the IVA your financial situation will be under scrutiny to make sure any change in your circumstances is accounted for.
An IVA remains on your credit report for six years, and if you fail to meet the agreed repayments, you will most likely be declared bankrupt, so the IVA should not be entered into lightly. However, for those people with a serious amount of debt, it can be an ideal solution.