WHICH IS THE BEST OPTION: BANKRUPTCY OR AN
IVA?
Which type of procedure really depends
on your financial picture. Each has pros and
cons.
An individual struck with serious financial
difficulties most likely will find bankruptcy
proceedings as the preferred type. Bankruptcy
Petitions are faster to complete, giving the
debtor a financial “fresh start” without the
years of sacrifice. On the other hand, an
IVA offers an alternative if the debtor has
a steady income, a stable job, and wants to
pay off most or all of his or her debts.
The advantages and drawbacks are summarised
briefly in the next pages.
(i) BANKRUPTCY Issues in Bankruptcy:- 1. The
amount of debt you can erase is not limited.
2. Unpaid balances due after assets are distributed
are erased (“discharged” in bankruptcy language).
3. Wages you earn and property you acquire
(except for inheritances) after the bankruptcy
filing date are normally yours, not the creditors
or bankruptcy court. Please note however that
the Court can still make an Order such that
the income of the bankrupt during the course
of the bankruptcy be partly paid into the
bankruptcy. In addition, windfall assets can
also be taken by the Trustee for the benefit
of the creditors. 4. The minimum amount of
debt required is £750.00. 5. If the debtor
petitions for his or her own bankruptcy, then
a Bankruptcy Order can be obtained more or
less immediately. The bankruptcy period will
cover either two or three years depending
on the nature of the bankruptcy. This can
be extended indefinitely depending upon circumstances,
although this is not particularly the case.
6. You lose your non-exempt property which
is sold by the Trustee. Exempt assets are
assets such as by way of example only, damages
from personal injury. 7. Some debts survive
and can be collected after your case is closed
(e.g. mortgage charges). 8. If facing repossession
of your home, lender’s efforts are not stalled
by the Bankruptcy Order. 9. Co-signors of
a loan can be stuck with your debt unless
they seek similar protection. 10. Bankruptcy
damages your credit rating. 11. Your pension
rights i.e. your ability to claim your pension
when it matures can be adversely affected.
This is because your pension could fall into
your bankruptcy. There are circumstances whereby
if a pension does not fall into your bankruptcy,
although each pension policy will have to
be examined in detail to ascertain as to whether
or not it falls into the bankruptcy. Therefore
if the debtor has a pension policy, it is
vitally important that he seeks professional
advice of either an IP or a bankruptcy lawyer
prior to petitioning for his own bankruptcy.
12. It is possible that you could lose your
house. All of your equity in your house will
automatically vest in your Trustee in bankruptcy
upon his or her appointment. If you have a
joint mortgage or a partner who has an interest
in your property then their share will remain
with them. Their share will not become the
property of the Trustee. There will ordinarily
be a legal presumption which will prevent
the Trustee from seeking possession of the
matrimonial home for one year after making
the Bankruptcy Order. This presumption will
then cease.
(ii) IVAs Issues in IVAs:- 1. You keep all
your property, exempt and non-exempt. 2. You
have a longer period of time to pay the debt.
3. The debts that are not cancelled although
the amount repaid can be negotiated with creditors.
4. You have protection against creditor’s
collection efforts. 5. Any co-signers are
immune from the creditor’s efforts so long
as the IVA provides for full payment. 6. Typically
the costs of an IVA will initially be greater
than those for a Bankruptcy Petition. This
is because an IP will require payment usually
in advance in order to draft a Proposal and
deal with matters. There will also be legal
costs. In the long term however, the costs
of an IVA are likely to be much less than
that of a Bankruptcy Order. This is because
the assets which are liquidated by the Trustee
in Bankruptcy will be subject to statutory
costs which are relatively large. In the course
of an IVA, once it is up and running those
costs do not apply. Instead, the Supervisor
will require payment for his activities of
supervising the arrangement although these
should not be too great. 7. You can apply
for an IVA even when you are the subject of
a Bankruptcy Order. This could be in the eventuality
that during the course of the bankruptcy you
decide that you would prefer the protection
offered by an Individual Voluntary Arrangement.
8. Whilst there is no limit to the number
of Individual Voluntary Arrangements that
an individual can enter into, there has to
be a gap of at least one year between each
Application for an Interim Order. 9. You can
separate your creditors by class. Different
classes of creditors receive different percentages
of payment. This enables you to treat debts
where there is a co-debtor involved on a different
basis than debts incurred on your own.
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