The Insolvency Act of 1986 made individual voluntary arrangements possible in the UK. At its very basic, an IVA is an alternative to filing for bankruptcy for individuals who look to avoid the negative consequences of a bankruptcy by opting for a somewhat less drastic measure.
When someone applies for an IVA, it is regarded as a formal proposal made on the behalf of the borrower to all his creditors. However, the debtor cannot make the proposal directly to the creditor. All IVA procedure needs to be supervised by a certified insolvency practitioner. An IVA, in normal cases, cannot alter the terms of secured loans a debtor has. However, he can expect to receive some compromises from his unsecured creditors.
Upon the creation of an IVA application, the insolvency practitioner will be called upon to ensure that all regulations for such an agreement have been complied with. For example, he needs to make sure that the borrower makes all the agreed upon payments in a timely manner and the creditors duly recognize those payments. An insolvency practitioner may also request financial records from a creditor now and then, including wage information, bank statements, etc.
An IVA basically is an informal contract between a borrower and his creditors. The terms of the contract could be as flexible as the circumstances of the debtor permits. The terms will be reached through negotiations between the creditors and the debtor.
After you apply for an IVA, a meeting will be arranged between you and the creditors and a final agreement will be reached upon during this meeting. The insolvency practitioner will need to supervise this meeting and officially record the terms of the agreement.
Although an IVA arrangement is seen as a better alternative to filing for bankruptcy, there are both pros and cons involved with the procedure and an individual should like to take them into account before he decides to apply for an IVA.
Benefits of an IVA
The most obvious advantage of settling for an IVA is that it allows a debtor to avoid the choice of bankruptcy. Bankruptcy is a legal action that can have long-term negative consequences upon a person's financial and personal life.
Another telling benefit with an IVA is that it gives the borrower greater control over his residential property. If he files for bankruptcy, on the other hand, the appointed trustee from the court will assume control over all the petitioner's assets, including his home.
One can still seek additional credit after one has applied for an IVA. Unlike a bankruptcy, an IVA does not prevent an individual from applying for further debts.
Many also believe that the social consequences of an IVA are more positive than a bankruptcy. And it is indeed true that an IVA is more of a private proceeding as compared to bankruptcy proceedings.
Another benefit with an IVA is that even after you have started a bankruptcy proceeding, you can still apply for an IVA. In that case, the bankruptcy proceedings will be cancelled and you will get an opportunity to strike up an informal contract with the creditors.
Drawbacks of an IVA
Many seem to believe that an IVA does not affect one's credit score. However, this is a gross misconception. Individual voluntary arrangements do have very serious negative consequences on a person's credit rating. However, it is true that it will not affect your credit score as badly as a bankruptcy petition will do and it will also have less enduring consequences.
There is another thing which many see as a drawback to an IVA. It is that when you apply for an IVA, you reach an agreement with creditors according to which you will have to pay regular monthly payments to the creditors. This, however, does not apply to a bankruptcy proceeding.
Even if you succeed to strike a favourable contract with your creditors through an IVA, there is no assurance that you will be able to honour the terms of the contract in the future. It is commonly understood that if you are going for an IVA, you already are in a financially straitened circumstances, so failing to honour an agreement would always loom as an unpleasant possibility. And if that happens, the creditors will be open to initiate further legal action against the debtor.