Suzanne Parker's interview with Jeremy Frost, Managing Director of Frost Group discussing the merits of Individual Voluntary Arrangements, also called IVA's and Bankruptcy. Personal debt is something that people don't want to think about, let alone freely admit to or talk about. Hopefully we can answer a few of your questions ...
Jeremy, personal debt is something people possibly don’t want to, but may need to think about?
Yes. Sometimes personal debt can become difficult to manage. This can happen for any number of reasons; divorce, redundancy, health issues and so on but when you find yourself consistently being unable to pay your creditors, then you need to take control of the situation. As with all things debt related, it can be difficult to face up to the issue or even realise that there is anything you can do to sort it out. The sooner you take action, the better.
So, starting with bankruptcy, can you tell us more about it?
Yes. Bankruptcy is a means of writing off your personal debts. It’s a very old procedure. It used to be that someone in bankruptcy was put into Fleet prison in London, charged to live there and only when their debts were paid off were they allowed to leave. Elements of this still exist!
With bankruptcy, all your debts are put into a “pot”. A trustee is then appointed to sell your assets and pay off your creditors from the proceeds after costs. It’s an expensive process with lots of involvement from the courts and public bodies. Additionally, you have to use the Government’s bank which charges 15% every time you make a payment into it!
It doesn’t sound very appealing to be honest!
Well, the positive thing about it is that once you start the bankruptcy process you are protected from further demands for money, visits from the sheriffs or bailiffs, from litigation being issued against you and so on. To have the stress and upset of those situations removed is a huge relief in itself and you can start to see a way forward.
What’s the alternative to bankruptcy?
There’s another process called an Individual Voluntary Arrangement, or IVA which offers an alternative to the substantial costs of Bankruptcy.
OK, how does it work?
You need to put together a proposal for your creditors and we help our clients to draft these. The proposal needs to demonstrate that the creditors will do better from an IVA than they would from bankruptcy. Assuming 75% of the creditors agree to it, then the other creditors are bound to it too.
An IVA is more flexible than bankruptcy and there is no VAT or court costs to pay. It crystallises the claims and any interest on debts is removed. The money to pay back creditors can come from ongoing income, remortgaging, the sale of some assets, loans from family members, a financial gift, or a drawdown of a pension pot.
How long does an IVA last?
It does depend on the circumstances, but as a very rough guide, if debts are being paid back from income then it can take up to 5 years. If they are paid back using a gift, then it could just be in place for a few months.
Does that mean that a person’s credit file is affected for up to 5 years.
If someone finds themselves in this situation then their credit file is already likely to be affected and in actual fact, if you’re trying hard to get yourself out of debt then borrowing isn’t a very good idea anyway. But yes, an IVA does go on a credit file.
From where I’m sitting, it sounds like an IVA is a better option than going bankrupt. Why doesn’t everybody just do IVAs?
For some, bankruptcy is the better option, but I agree that compared to a debt management plan over five years, IVAs are infinitely preferable. However, they’re not always possible, it depends on individual circumstances and some creditors will have minimum requirements that need to be fulfilled. For example, if HMRC are one of your creditors they will require you to have up to date tax returns. Other reasons may include that you can’t remortgage or you can’t offer enough to creditors to make an IVA an attractive option to them.
The important thing here is not to assume anything. Talk your circumstances through with us and we can advise on the best course of action and help put a plan together. We are regulated by both the FCA and the IPA and all our initial advice is free of charge - this can be provided over the telephone or face to face, whichever you prefer. Please feel free to telephone our office on 0845 260 0101 - and we can arrange a free appointment with Jeremy.
At Frost Group, we want to make things as easy as possible for you. That is why, if you can’t come to us, we’ll come to you. We operate face to face, nationwide meetings, wherever is most convenient for you.