01.07.09
IVA, Trust Deeds & Bankruptcy
IVA (Individual Voluntary Arrangement)
An IVA, like bankruptcy, is a form of insolvency. It’s a legally binding agreement between an individual and their unsecured creditors:
• The individual agrees to make a fixed payment every month for (normally) 5 years.
• The creditors agree to freeze interest, not to take (further) legal action and to write off any outstanding debt once the IVA has been successfully completed.
Why would creditors agree to write off a portion of the debt? Often, it’s simply the best way for the individual to repay a significant portion. Since IVAs are normally only available to people whose unsecured debts total at least £15,000, creditors know that refusing to agree to an IVA might force the borrower to look into bankruptcy or unrealistic debt management plans, which could mean lower returns for them.
However, although it’s a way to avoid bankruptcy and its consequences, an IVA is no light matter – it’s a 5-year commitment which often requires homeowners to release equity so they can pay their creditors as much as possible.
Trust Deed
A Trust Deed is an alternative to bankruptcy which is only available to residents of Scotland.
It’s similar to an IVA, with two major differences. First, most Trust Deeds run for 3 years (rather than 5). Second, Trust Deeds are normally available to people with unsecured debts of £10,000 or more (not £15,000).
Bankruptcy
When someone is declared bankrupt, their assets are handed over to an Official Receiver, then sold so the money can be divided up among their creditors. When they’re discharged from bankruptcy (usually after 12 months), any debt they can’t afford to repay is written off.
The word ‘assets’ doesn’t include standard household objects, but does include valuable items such as the bankrupt’s home and (unless it’s both inexpensive and essential for work) their car.
Any creditor who is owed more than £750 can apply for the borrower to be made bankrupt (this is known as involuntary bankruptcy), but there’s also voluntary bankruptcy. Anyone can apply to be made bankrupt, and in some cases it really is the best way forward – if:
• Their debts are high
• Their income is low
• They don’t own property or other valuable assets
• Their financial situation isn’t likely to improve.
Even then, they should only look into bankruptcy if they’ve spoken to a debt adviser and discovered that none of the other debt solutions is the answer to their debt problems. Even The Insolvency Service says that “Bankruptcy should always be the last resort”.
