A Bankruptcy Lawyer’s Blog

Are Onerous IVA’s Pushing Debtors Into Bankruptcy?

Where a debtor is struggling to repay their debt, one of the options to resolve the problem is the Individual Voluntary Arrangement (or IVA). An IVA allows a debtor to pay as much as they can afford towards their debt over a fixed period of time (normally five years). One the agreed amount has been paid, any outstanding debt is written off and the debtor is allowed to continue with their life debt free.

Many debtors are attracted to the individual voluntary arrangement because of its significant advantages. For example, the debt is usually paid in the form of a single monthly payment which is easy to manage. These monthly payments continue for a fixed period of 5 years. No further interest or charges can be added during this time and at the end of the arrangement all remaining debt is written off. This means that the debtor always knows exactly where they stand. They know when they will be free of debt and have light at the end of the tunnel.

In turn, creditors also know what to expect from an individual voluntary arrangement. Once the arrangement is in place, creditors no longer need to spend time and considerable cost trying to recover outstanding debts. Their returns from the IVA are agreed up front and the day to day management is performed by an insolvency practitioner.

The light at the end of the tunnel that an IVA provides for a debtor is extremely important. If you are just paying each month into what seems like a never ending black hole with no hope of your circumstances ever improving, then the likelihood is that you will become disillusioned and start to fail to make your repayments. This is certainly no good for creditors who then have to continue with their debt recovery actions costing additional time and money.

On the face of it then, the individual voluntary arrangement is a perfect solution for many debtors and creditors alike. However, over the past eighteen months, creditors have increased the demands they put on debtors before an IVA proposal will be accepted. Despite the claims of many creditors that they will review each individual case on its own merits, it has become common place to demand that all debtors live within standard and extremely tight household expenditure budgets.

A single person may be required to live with a budget for food, toiletries and cleaning of between �100-�150 per month. Often no allowance is allowed for additional expenditure such as birthdays, Christmas or holidays and with a contingency amount of just �20 per month. When you take into account that a debtor in an individual voluntary arrangement will have to stick to their expenditure budget for 5 years, this is a daunting prospect.

The worry is, that with creditors demanding increasingly onerous restrictions on expenditure, debtors will enter into individual voluntary arrangements that they cannot afford to pay. When a debtor is in the middle of trying to manage a difficult debt problem, they may be extremely stressed and not able to think clearly. They will be prepared to agree to almost anything if it will take away the pressure of their debt being mounted upon them by creditors and collecting agents. Agreeing to expenditure budgets that they just cannot realistically stick to will almost certainly lead to a situation where the debtor stops making their IVA payments and the arrangement fails. In these circumstances, many debtors who initially wanted to make an effort to repay their debts, will decide that enough is enough and declare bankruptcy.

An increasing number of people declaring bankruptcy is exactly what creditors such as high street banks and the government want to avoid. The government is currently trying to kick start the economy through quantitative easing (QE). This process is designed to give banks access to finds which they can then pass into the economy in the form of mortgages and loans. However, if the banks are simply retaining these extra funds as a contingency against the non payment of bad debts, then the effect of QE will be greatly reduced. In the light of this, this is a time when banks should be helping struggling debtors to avoid bankruptcy. Making the alternatives such as IVA more feasible for debtors is surely is one way of doing this.

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