The Advantages and Disadvantages of Individual Voluntary Arrangements

What is an Individual Voluntary Arrangement?

Individual voluntary arrangements, simply abbreviated as IVA, is a legal arrangement whereby a debtor is allowed to reach an agreed compromise with a debtor. It allows the debtor to repay his or her debts using an affordable sum and without any further interest. An IVA allows he creditor to get back a portion of the debts in absence of the legal costs required to start bankruptcy proceedings.

How They Works

The working of individual arrangements involves the setting up of a new agreement between a debtor owing more than 15,000 pounds in debts and their creditors. All the monthly debt repayments that the debtor is supposed to pay are replaced with a single new payment that is based on affordability. As soon as the IVA has been agreed upon, at the creditors meeting, it becomes legally binding on each person party to the agreement. However, 75% of the creditors or more must agree to the plan.

Voluntary arrangements worked on a fixed repayment time period of five years. This means that the debtor will not necessarily have to repay the entire debt by the end of this time period. Hence, any money that will not have been repaid by the end of the IVA's fixed five year time period will be written off by the creditors legally.

Advantages of Voluntary Arrangements

An Iva does have some merits favoring the person owing money. One of them is that it can be drawn to meet the situation the client is experiencing. This way, assets such as the family apartment can be excluded from the IVA provide the creditors are okay with it, for instance because they will be better off overall than if they filed a bankruptcy. Additionally, there is no publicity or stigma that is usually associated with bankruptcy. Also, if the client operates a company, it can continue with its business operations and provide the required income to fund the IVA.

Another merit is that the debtor is not subjected to the restrictions that bankruptcy imposes, hence he or she can still continue with their post as company director while obtaining credit for the business. The merits do not favor the client only, but also the creditors. For instance, creditors can receive higher amounts of payments that would be the case if they filed for bankruptcy. In addition, creditors who are unsecured and voted against the individual arrangements would still be bound by it.

All creditors who are unsecured, to whom the proposal of the IVA is sent, are still bound by the arrangement even if they are not in agreement with the proposal. This is as long as 75% or more of the remaining creditors in value consent to the proposal. Unlike the case of a filed bankruptcy, details of individual voluntary arrangement are not openly published. It is a confidential agreement between a debtor and his or her creditors, with landlords and employers are not informed.

Disadvantages of individual voluntary arrangements

As much as IVAs have some merits, they also have some demerits. A notable one is that when contributions from income are being made, voluntary Arrangements are generally expected to last for longer than in the case of a bankruptcy. The period is five years when compared to that of three years for a bankruptcy. This period is usually required by creditors as a bargain to allow the person owing the money to avoid the costs of bankruptcy.

Another disadvantage is that if the debtor fails to comply with the terms of the IVA, his assets and home are sill at risk. This can occur if these assets have not been specifically barred from the agreed proposals. Additionally, if the IVA fails as a result of the debtor failing to meet their obligations under it, there is a likelihood that at this time the debtor will be made bankrupt. There will be no chance for a bankruptcy trustee to conduct investigations of the debtor's actions or the possibility of assets that are hidden.

Another notable demerit is that if the debtor owns property and it has equity available during the IVA period, then the creditors can demand that some of the equity be released to further assist in settling the debt. This usually happens in the IVAs third or fourth year.