Individual voluntary arrangement (IVA) vs other personal debt programmes

An Individual Voluntary Arrangement (IVA) is a common debt recovery process in England, Scotland and Wales. It offers a number of benefits to those trying to escape unmanageable debt, but IVAs aren’t the only answer available to people experiencing serious creditor pressure.

A number of other personal debt programmes exist, and depending on individual circumstances, may provide the breathing space needed to pay back debts in full, or at least a pre-agreed proportion, with the remainder often being written off.

Before we look at these alternatives, however, what makes an IVA such a popular method of dealing with debt?

IVA – how does it work?

An Individual Voluntary Arrangement is designed to help individuals deal with serious debt, and on its introduction in 1986, it was heralded as an alternative to bankruptcy. A key benefit of this procedure is that it freezes all interest and charges on the debt, and prevents further escalation of the debtor’s poor financial position.

Creditors are also unable to take legal action whilst the agreement is in place, as long as the debtor abides by all its terms and conditions. Generally lasting for five years, an Individual Voluntary Arrangement may require equity to be released if the debtor is a property-owner – if not, repayments will typically need to continue for a further 12 months.

Important points when considering an IVA

• At least 75% of creditors must agree to the insolvency practitioner’s proposal
• Unless the IVA provides a better return for creditors than bankruptcy, creditors are unlikely to agree to the arrangement
• Non-priority debts such as credit and store card arrears, personal loans and overdrafts, are generally included in an IVA
• The cost of an IVA is factored into monthly repayments
• If the terms and conditions aren’t met, creditors may enforce bankruptcy on the debtor
• An IVA is legally binding on all parties

So with these points in mind, what other personal debt programmes might be available, and how do they compare with the Individual Voluntary Arrangement?

Debt Management Plan (DMP)

How does a DMP work?

Unlike an IVA, a debt management plan isn’t legally binding. A DMP provider negotiates with creditors for affordable repayments to be made from the debtor’s disposable income, and creditors are repaid in proportion to the size of their debt.

Information about the debtor’s financial situation, including monthly income and expenditure details, is presented to creditors in a proposal document.

IVA or Debt Management Plan – Points to consider

• The unofficial nature of a DMP, although a negative aspect for many, can be an attractive feature to some debtors if they foresee being able to pay off their debts in a relatively short time.
• It’s not guaranteed that creditors will agree to freeze interest and charges, as occurs with an IVA, however, and even if they did, they can change their minds at any time. The same applies to legal action.
• An IVA provides greater certainty of outcome for a debtor, even though it can last for up to six years in some cases. It’s important to remember that a DMP can extend for longer than originally anticipated if one or more creditors decide to add interest and charges to their debt.

Bankruptcy

How does the bankruptcy process work?

Bankruptcy involves a debtor handing over control of all their assets, including property, to the trustee appointed to administer the process. The trustee then sells these assets to repay creditors.

As far as property is concerned, there may be some instances where a sale isn’t financially worthwhile – if little or no equity exists in the property for example, and to do so would incur excessive costs.

Bankruptcy generally lasts for 12 months, after which time the individual is discharged, but they may be required to contribute further if they have residual income – typically for up to three years, via an Income Payments Arrangement (IPA).

IVA or bankruptcy - Points to consider

• Bankruptcy is a quicker process, but also often involves the loss of a debtor’s property. An IVA, on the other hand, generally requires the release of equity rather than sale.
• Bankruptcy restrictions of up to 15 years can be imposed in some circumstances. These could include when a debtor has failed to cooperate with the trustee, or hasn’t declared all of their income.
• Bankruptcy is generally viewed as a measure of last resort, due to the loss of assets by the debtor.
• Both IVA and bankruptcy are public procedures in that they’re included in the Individual Insolvency Register, but bankruptcy is also advertised in the Gazette. This can alert employers to a debtor’s situation, and may affect their employment.

Debt Relief Order (DRO)

How does a DRO work?

Debt Relief Orders are generally aimed at people who own few assets, have little or no disposable income, and owe under £20,000. They provide a respite from creditor pressure, in that creditors have to go through the courts if they want to take legal action to recover their debt whilst the DRO is in place.

A debt relief order lasts for 12 months, during which time the debtor makes no payments towards their unsecured debt. If their circumstances remain the same after this length of time, the debts are written off.

IVA or DRO - Points to consider

• Certain restrictions are placed on the debtor during the term of a debt relief order. These include having to tell lenders that they’re party to a DRO if they seek borrowing of £500 or more, and not being able to set up or be involved in the management of a limited company, without court approval.
• If a debtor is found to have misled the court about their financial situation – they own property, for example, or have more money than they declared – a Debt Relief Restrictions Order (DRRO) can be put in place for up to 15 years. This would extend the restrictions placed on the individual for this period of time.
• If a debtor’s financial situation improves during the term of a DRO, the arrangement may be cancelled and they’re likely to have to contribute towards repayment of their debt. Similarly, if they haven’t cooperated fully with the Official Receiver, the debt relief order could be stopped.   
• The fact that little or no disposable income is a key feature for DRO eligibility means that an IVA would be ruled out for someone in these circumstances.

Administration Order

How does an Administration Order work?

If a debtor has a County Court Judgment (CCJ) against them and they can’t afford to pay, an Administration Order allows for a single repayment, calculated after all essential living expenses have been covered, to be made towards their debts. Money must be owed to at least two creditors, and the total amount of debt must not exceed £5,000 for an individual to be eligible for this personal debt programme.

IVA vs Administration Order - Points to consider

• The monthly repayment is paid to the court, and then distributed by the court to each creditor included in the administration order.
• An administration order typically lasts for up to three years
• IVAs are generally more appropriate when more than £5,000 in debt is owed

Debt Consolidation

A debt consolidation loan, although not a formal debt programme, can help a debtor to regain control of their finances. Multiple debts are consolidated into a single loan, and affordable repayments made over a longer period of time.

Consideration needs to be given to the type of consolidation loan that is taken out, however, as if the lender wants to secure it against property, it places the debtor’s home at risk. The debt programmes mentioned above may also be more suitable if it’s likely that the debtor will want to seek further borrowing during the term of the consolidation loan.

If you would like more detailed information about these processes and personal debt programmes, contact one of the team at Begbies Traynor. We work from over 70 offices around the UK, and can offer a same-day meeting free-of-charge.