An individual voluntary arrangement (IVA) is a formal alternative in England and Wales for individuals wishing to avoid bankruptcy. In Scotland, the equivalent statutory debt solution is known as a protected trust deed.
The IVA was established by and is governed by Part VIII of the Insolvency Act 1986. It constitutes a formal repayment proposal presented to a debtor's creditors via an insolvency practitioner. Usually but not necessarily, the IVA comprises only the claims of unsecured creditors and leaves the rights of secured creditors largely unchanged. Insolvency practitioners charge initial and ongoing fees that are in addition to the debt.
An IVA is a contractual arrangement with creditors and can be as flexible as an individual's own circumstances. It can therefore be based on capital, income, third-party payments or a combination of those.
In this process, a debtor who has enough money left over after priority creditors and essential expenses, may be able to arrange an individual voluntary arrangement. (After taking independent advice, debtors with less serious problems may wish to consider a debt management plan.)
The analogous procedure for businesses is the company voluntary arrangement.
Process
Creditors take a decision at a creditors' meeting called to consider the IVA proposal. The return to creditors is often higher than they would receive in bankruptcy. A vote is taken – by value. 75% in value of those creditors who vote at the meeting by person or by proxy must agree in order for the arrangement to be approved. If any of those voting are 'associates' (usually business associates, friends and family) then a second count is taken and 50% of non-associated creditors must approve it.
IVAs were originally designed to provide relief to debts generated as a result of business insolvency. Since the late 1990s increasing levels of consumer debt have led to many insolvent individuals with non-business-generated debts seeking the legal protection offered within an IVA. IVAs may be popular with people who have assets which they wish to protect. These assets, such as high-equity properties and expensive cars etc., are not directly at risk under an IVA – as they may be in a bankruptcy.
Advantages and disadvantages
The advantages and disadvantages of an IVA compared with other debt solutions are particular to a debtor's individual circumstances and professional advice should be sought to decide on the best option.
Stigma
An IVA is a private agreement between a debtor and creditors. As of 6 April 2009, bankruptcy is no longer advertised in the local newspaper, only in the London Gazette. IVA is not advertised. Both debtors in an IVA and bankruptcy are listed publicly on the Personal Insolvency Register - anyone can view the Insolvency Register but it is mainly used by credit reference agencies who use it to update credit records (an IVA will affect your credit record but this is the same as with other debt solutions), and creditors who will use the Insolvency Register to help them make a decision on whether they should lend money to potential customers. It is unlikely neighbours will check the Register, which can be a worry people assume when they find out they are going to be listed on a public register.
Length
An income-based IVA can often last up to five years, although it can be any length. Homeowners may find their income based IVA term can be extended by 12 months in lieu of equity, if they own equity in a property which cannot be released into the IVA for the benefit of their creditors.
A bankrupt is normally automatically discharged after one year or less if the bankrupt is eligible for an early discharge. An income payments agreement or order in bankruptcy (if one is applied, depending on the individual's disposable income) will not last for more than three years and payments are generally much lower than under an income based IVA.
Obtaining credit
Unlike bankruptcy, an IVA does not statutorily restrict a debtor from obtaining credit, although the proposal may do so. In bankruptcy however one legally can obtain credit of up to £500 without disclosing one's status as a bankrupt. After a bankrupt is discharged there is nothing in law to stop the discharged bankrupt gaining credit.
Ability to trade
Bankruptcy will usually dissolve a partnership and prevent a debtor from acting as a director of a company. A self-employed trader will have to disclose the fact that he or she is bankrupt when obtaining credit, for example when dealing with suppliers. There are no such implications with an IVA, although lenders often ask.