UK: Are Debtors Being Disadvantaged By IVAs?

Last Updated: 21 April 2011
Article by Toby Holt

Toby Holt argues that, as the legislation stands today, for most debtors bankruptcy is a better solution than the individual voluntary arrangement.

There have been a surprisingly large number of individual voluntary arrangements (IVAs) approved over the last few years.

Surprising in the sense that often the debtor will have to make contributions from his/her salary for a five-year period, and if a property is owned, will have to revalue it in month 54 of the arrangement and still inject sufficient funds to pay creditors for any equity that may have accrued in that period.

Surprising too when one realises that bankruptcy only lasts for one year and that income payment agreements only run for a maximum of three years. The trustee must also realise any equity within three years of the bankruptcy order.

Is the stigma of bankruptcy so bad considering over 64,000 people went bankrupt in the year to 31 September 2010?

The bankruptcy system was originally set up as a place of sanctuary where debtors could go to deal with their debts as there was no practical alternative. I would argue, as the legislation stands today, that for most debtors bankruptcy remains the most suitable regime.

Are these debtors involved in an industry where they are unable to work if made bankrupt? This is unlikely. The statistics from the department for business, innovation and skills show that the vast majority of IVAs are entered into by non-professionals who would be able to continue to work if a bankruptcy order was made against them. So are they getting the best advice from the larger providers of IVAs? Possibly not.

Having recently assisted debtors in putting together proposals in more complex IVAs (one debtor worked overseas and the other had three trading businesses) it also appears that creditors may have started to overstep the mark in their expectations of debtors.

In one instance the debtor chose to take out an insurance policy which ensured that all the debts of his IVA would be paid in the event of his death during the period of the arrangement. Surely a most sensible approach, and one which he had taken as he did not want to risk leaving his partner with the prospect of selling their jointly-owned property should his worst fears be realised.

A well known organisation, which acts for a number of credit card companies and charges them for the privilege, initially refused to allow the debtor to pay for this policy. Are creditors now able to dictate how and what a debtor spends his money on?

I can understand the argument that the creditor may well want more to be offered by way of a dividend – but surely they cannot dictate in which way the debtor spends the residue? Fortunately, after much discussion a deal was eventually struck which allowed the debtor to take out the desired insurance policy.

The alternative in this instance was bankruptcy, which would have resulted in a far lower dividend being received by the creditors. Not only was the debtor being told what he could and could not spend his income on but the creditors' representative was prepared to risk his client receiving a far lower dividend than in the IVA.

It is clear to me that the choice of insolvency practitioner when asking for advice is paramount to both debtors and creditors alike.

Case study

My firm was contacted by a land owner, who happened to sit on the board of a clearing bank. His gamekeeper had got into trouble financially and had no way of making contributions from his low wages. He lived on the estate in a house that came with the job. As a gesture of goodwill to the debtor's creditors, the employer was prepared to offer creditors £25,000 as a one-off payment through an IVA. The proposal meant that creditors would receive payment of 20p in the £1 within one month of the approval of the arrangement.

Because the dividend offered was below certain credit card companies' thresholds, their representatives rejected the proposals, and the offer of the money was withdrawn. The debtor subsequently went bankrupt and the creditors received nothing.

Whose interests were the representatives serving?

Nominees' fees

Many so called 'debt factories' have their nominees' fees limited by creditors. These factories are set up to knock out simple proposals and often do not even meet the debtor, therefore keeping costs low.

But what of proposals that are a little more complicated, predicated on a trading business where cash flow forecasts are needed, or where the debtors' affairs do not easily fulfil the one size fits all methodology, where the debtor will need to meet with his nominee several times?

Is the debtor going to be penalised because the insolvency practitioner who could put together a more complicated proposal is going to shy away from taking the instruction for fear that he will lose money if his fees are capped? Are the creditors who force nominees to repay their fees that have been paid upfront back into the arrangement not just limiting the options for a debtor? Surely if a debtor wants to use certain trusted advisers and has been told of the fee structure in advance then that is a matter for them not the creditors? Should the creditors have the right to limit the choice of a debtor to only using cheaper firms, who may not be giving the best advice?

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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