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WHICH WAY FORWARD?
BANKRUPTCY
or
INDIVIDUAL VOLUNTARY ARRANGEMENT ("IVA")
The options of not taking any action or of attempting to agree
an informal arrangement are not covered below as they are
assumed to have been examined.
| Advantages
of an IVA |
| 1. |
Provides an alternative solution
to bankruptcy, in that creditors cannot commence
bankruptcy or other proceedings (for example sending
in the Bailiff ) once an Interim Order is obtained
or at all, following approval by 75% (by value)
of creditors.
|
| 2. |
Provided the Debtor complies
with the terms of the IVA, creditors' claims are
deemed to be settled on the successful conclusion
of the IVA. It is not necessary to propose payment
in full of one's debts. The principal considerations
are normally as follows
| (i) |
Is the Debtor paying as much
as a creditor could reasonably expect?
|
| (ii) |
Is the outcome for creditors
better than if the Debtor were to be made
bankrupt?
|
| (iii) |
Is the Debtor prepared and
able to make the proposed financial sacrifices?
|
| (iv) |
Are there factors which reduce
the chance of a successful outcome and, if
so, is the Debtor prepared to run the risk
of failure?
|
| (v) |
Are there post IVA factors
which could result in 'fresh' insolvency proceedings?
|
|
| 3. |
Avoids the publicity and stigma
associated with bankruptcy. It should, however,
be noted that the stigma is, for many people,
less relevant than it may have been five years
ago.
|
|
| Disadvantages
of an IVA |
| 1. |
Many IVAs, especially those based
on income generation, continue for five years.
|
| 2. |
It is possible that there may
still be restrictions on obtaining credit (due
to Credit Rating agencies being aware of the IVA,
via the DTI / Court references.)
|
| 3. |
Although the IVA is not advertised
publicly - only known creditors are informed -
there is no restriction on creditors passing on
the details. Creditors not included are not bound
by the IVA and retain their remedies, although
they usually agree to be bound or, if appropriate
and necessary, the Court can adjudicate.
|
| 4. |
The Debtor's ongoing financial
position may be worse than if bankruptcy were
to ensue. However, one should be aware of the
possibility of an Income Payments Order being
obtained by the Trustee in Bankruptcy.
|
| 5. |
If the IVA fails, the debtor is normally
back to 'square one'.
|
| 6. |
Funds are required to prepare
a Proposal, secure an Interim Order from the Court
and convene and hold a meeting of creditors. There
is no guarantee that creditors will accept the
Proposal as presented. The Debtor can of course
refuse to accept any modifications (which are
either proposed at the meeting of creditors or,
more commonly, when a creditor returns their proxy
and proof) but that normally results in the creditors
voting against the Proposal.
|
| 7. |
The quantum of preferential claims
can affect the dividend prospects of unsecured
creditors (the same applies in a bankruptcy).
However, the ‘Crown debts’ are no longer preferential.
|
| 8. |
Some claims may not be capable of
quantification at the time the Proposal is prepared.
However, there are usually ways of addressing this
issue. |
|
| Advantages
of Bankruptcy |
| 1. |
Should lead to an early resolution
of the financial 'pressure' on the Debtor.
|
| 2. |
Should result in no further financial
commitment to creditors but note effect on property
assets.
|
| 3. |
Cost of presenting one's own petition
is £360. No other material outgoings.
|
| 4. |
The bankruptcy may come
to an end after one year (but a Restriction Order
may be for longer period). |
|
Disadvantages
of Bankruptcy
Apart from the obvious ones affecting one's personal
esteem, they include the following |
| 1. |
The issue of any matrimonial home
or property subject to secured lending still has
to be addressed.
|
| 2. |
There is the possibility of an Income
Payments Order, depending on the Debtor's income
during the bankruptcy.
|
| 3. |
Discharge may be deferred if do not
co-operate with Trustee.
|
| 4. |
Bankruptcy can lead to the loss of
professional qualifications and the ability to act
as a Director of a company. These obviously impact
on one's earning capacity.
|
| 5. |
Securing an annulment,
as against a discharge, is often more expensive
than the IVA procedure. |
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Please note this is not intended to be an
exhaustive list of pros and cons. The circumstances of each
Debtor will be different and will have to be evaluated accordingly.
These notes are only intended as an aide-memoire and no responsibility
is accepted if they are used by a third party who has not
had these points, and related factors, fully explained.
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