1) Individual Voluntary Arrangement (IVA)

2) Bankruptcy

3) Debt Management

1) Individual Voluntary Arrangement (IVA)

An IVA is a legally binding agreement between an individual and his/her creditors. It provides an opportunity for an individual struggling with debt to clear them once and for all.

IVA’s usually last for 5 years and are made up of monthly contributions and/or the sale of property. This means that the individual makes regular contributions out of his/her income.

As a general rule, if what is being proposed by the individual will provide creditors with a better outcome than would occur in a bankruptcy, then creditors will consider any fair and reasonable offer.
The repayment proposal is based upon what is affordable throughout the duration of the arrangement and the total of the monthly payments can be significantly less than the full amount of the debt owed although creditors would be accepting the offer in full and final settlement. This means that at the end of the arrangement any balance remaining on your debts is written off.

Once agreed, an IVA will prevent creditors from adding any further interest to the debt or taking any legal action such as obtaining County Court Judgments. The suitability of an IVA depends on an individual’s circumstances and normally their debts must be above £20,000.

An IVA must be supervised by a licensed insolvency practitioner who is also responsible for negotiating with your creditors and regularly reviewing your circumstances. Homeowners may be required to release a proportion of the equity in their home and contribute this to their creditors, or perhaps to provide alternative or third party funds to the same value.

2) Bankruptcy

Bankruptcy is available to anyone who’s debts are more than £750.
It provides them with an opportunity to make a fresh start. It is most appropriate in cases where an individuals debts are so overwhelming that there is little or no prospect of them ever being repaid or an offer to settle them being agreed.

A bankruptcy order will be advertised in the local press and the Debtor will lose assets including their interest in a property, life insurance and maybe their pension. They will also lose any assets that they would acquire during the period of the bankruptcy such as inheritance, insurance settlements etc. Any high value items that are deemed essential maybe sold by the trustee and replaced with less expensive ones.

A Debtor may also have his/her bank account closed and anything that is subject to a finance agreement will have to be returned.

Business professional status may be lost and some employment opportunities prejudiced as well as rejection from many associations and societies.

If you would like to download the Department of Trade and Industry’s Guide to Bankruptcy

3) Debt Management

Debt management companies simply negotiate with an individuals creditors on their behalf. Most of them charge a monthly fee for this service. The idea is to try and persuade creditors to lower the required monthly repayments so that the individual has the opportunity to make smaller payments over a longer period of time. They will try to reduce or freeze interest payments.

There are drawbacks to this course of action: -
a) The first is not to choose an unscrupulous debt management company who may overcharge for their services.
b) The second is that the individual will still have to pay off all of his/her debts, often for much longer periods of time as a result of added interest. Potentially, this could increase the actual level of debt and lead to plans extending over 20 years.