Personal insolvency

There is an alternative to going Bankrupt

It is called an Individual Voluntary Arrangement ("IVA"). Although bankruptcy may not carry the same stigma as it did in yesteryear and, in particular, because of the recession in the early 1990's, there are still major disadvantages in being a bankrupt

• One cannot be a company director

• One cannot have a credit card

• One has less chance of controlling ones own monies

It is sometimes possible to persuade your creditors that they will be better off, if you avoid bankruptcy by entering into an IVA. There is little incentive for a bankrupt to work hard during his 2/3 years bankruptcy. He is financially restricted and he may be tempted to work in return for untraceable cash. In an IVA, the "financially challenged" individual promises to work very hard for the benefit of his creditors but, in return, the creditors must accept in full and final settlement only a percentage of their original debt.

Example

A man might owe his creditors £100,000. They are all clambering for repayment. He cannot pay them all right now. He needs time to make repayments. Typically, they may accept £40,000 i.e. each of them get 40p in the £ over 3 years, rather than make him bankrupt and receive nothing.

What you should do

It is important to act sooner, rather than later. Too many people leave it until the bailiffs have visited their homes and taken away anything saleable, debtors have got Court Judgments and put Charging Orders on their property and a Bankruptcy Petition is about to be issued

Make a list of secured and unsecured creditors. The secured creditors will have a mortgage or charge on property. Typically, a secured creditor will be a bank or building society

Make a list of all the creditors, stating their full names, addresses and the amounts they are owed. If they are secured, describe the asset on which they have a mortgage or charge. In order to push the IVA through, you will need the votes of 75% in value of the creditors, attending a meeting

Look at the big value creditors first. Typically, these will be the bank (to the extent that they are unsecured), the Inland Revenue, Customs & Excise and equipment lessors. Smaller value creditors either will not take part, or will vote in favour by proxy. You stand a good chance of carrying them with you.

Consider whether you can hold out realistic and attractive proposals for the creditors. You will need to persuade them that, if they do not put you into bankruptcy, you can get a much better return for them. Ignore assets that you already own. Creditors will have the benefit of those in a bankruptcy. Be prepared to show the creditors how you can earn money over, say, a 3 year period to give them something which they would not otherwise have.

Licensed Insolvency Practitioner

The next stop is a Licensed Insolvency Practitioner ("LIP"). He, and only he (or she), can make the application on your behalf to the Court  and is supposed to forward only those proposals with a chance of succeeding. He will require an advance fee of anywhere between £1,500-3,000

He will put together a proposal, in the appropriate format, dealing with various aspects of the administration of the IVA, including the frequency of your payments into it, his fees and certain other clauses

Unfortunately, some LIPs are more concerned with their fees rather than the long term viability of the IVA. The debtor is not thinking clearly. Not only is his business in difficulty, but very often, has matrimonial difficulties at the same time and is very emotionally distressed. Many LIPs do not explain clearly to the debtor those tax liabilities which will fall within the IVA and those which are, or which will be, the debtor's full responsibility.

The attitude of the Courts and LIPs to pension has changed over the past few years and you will need to understand the position in this respect. Call us for advice.

Related topics you may find useful:

Bankruptcy
Insolvency
Taxation
Losing your home

Call Michael Breeze on 07900 195 195 or call 0845 270 2511 to set up an appointment