IVA’s and Bankruptcy
Bankruptcy in the UK (excluding Scotland where slightly different legislation applies) can be avoided by entering into an Individual Voluntary Arrangement (IVA). Even if a debtor has recently been made bankrupt then there are circumstances where an IVA can retrospectively get the personal bankruptcy annulled. Alternatively if a debtor has entered into an IVA and wilfully stopped making the agreed payments or failed to disclose to creditors some material fact in his Proposal (usually hiding assets) then a bankruptcy usually swiftly follows.
An IVA to avoid bankruptcy
An IVA proposal can be made at any time. Even if the debtor has already been made bankrupt by the Court an IVA Proposal can be made retrospectively. The current bankruptcy legislation now asks the Official Receivers Office to try to determine whether an IVA is preferential to bankruptcy; however in practice the Bankruptcy Courts are so swamped with applications that the debtor is always better advised to try to obtain independent advice.
In trying to get the bankruptcy overturned the debtor must engage a specialist (usually an Insolvency Practitioner) to prepare an interim Proposal to the Court. The Proposal often needs to be delivered in a very short timescale so that the Official Receiver can decide whether to affirm the bankruptcy or hold the final bankruptcy decision until a fuller Proposal can be delivered to the Court.
A specialist IVA Insolvency Practitioner such as ourselves will be able to determine very quickly, the likely prospects of an IVA succeeding for any given set of facts.
Bankruptcy following IVA failure
Of the 45,000 IVAs approved during 2006 probably about 20% will fail at some point during the average 5 year period that an IVA normally lasts. Many IVAs in danger of failure (usually for non payment of agreed monthly instalments) are capable of variation by the supervising insolvency practitioner (with creditor approval) providing it is in the overall interests of the creditors to do so. A Variation Order can be applied for by the Insolvency Practitioner acting as Supervisor of the IVA, at any time to stop the agreement failing.
Depending upon the facts of the IVA, if a debtor stops making payments or otherwise contravenes the terms of the IVA, then the Supervisor has to advise the creditors of this fact. The Supervisor can also make the recommendation that an application for bankruptcy be made against the debtor. The creditors will only usually agree to the application for bankruptcy if there are sufficient assets available to pay the creditors a reasonable dividend. A creditor’s petition for bankruptcy normally costs about £1600 and they do not often “throw good money after bad” unless prospects of asset recovery are good. It should also be noted that there are a small class of creditors, including HM Revenue and Customs which may apply to make a debtor bankrupt irrespective of asset recovery.
