The decision by businesswoman and former glamour model Katie Price to work with her creditors to try and agree an Individual Voluntary Arrangement (IVA) has shone a spotlight on a procedure many might not have heard of – but it’s actually the most common form of personal insolvency.
The number of IVAs is currently at a record level and parts of the North West have some of the highest rates in the country; 8,345 people in the region entered an IVA in 2017, according to government figures.
However, according to debt expert Paul Barber, most ordinary people who get into financial difficulties nowadays do so because they are struggling to make ends meet and not because of reckless overspending, and for some people in that position, an IVA will be better suited to their circumstances than bankruptcy, which is a better-known form of personal insolvency.
Paul, who is the North West regional chair of the insolvency and restructuring trade body R3 and a partner at Begbies Traynor, explains: “In an IVA, you retain control of your property and assets – unlike bankruptcy, where they come under the control of a trustee.
“An IVA also carries less stigma and is less likely to affect your employment. People who are bankrupt are not allowed to be a company director and may be restricted from working in certain jobs and in the public sector.”
IVAs are a formal insolvency procedure and are a binding agreement between an individual and their creditors – the people they owe money to. Typically the individual agrees to repay a portion of their debts over a set period, usually five years. Interest charges are frozen and creditors are prevented from taking further action outside of the IVA process.
IVAs cover unsecured debt such as credit cards but do not cover mortgages and secured loans unless the lender agrees. Usually the individual will have to continue making repayments on these as usual.
Paul Barber adds: “An IVA is very flexible and can be tailored to individual circumstances. Ideally it will reduce the repayments and the total debt to a more manageable level. As the agreement is binding on creditors, it should also stop all the phone calls and payment demands that can be such a stressful part of being in debt.”
Before an IVA starts, an individual will put forward a proposal which creditors can then vote on – this is the stage Katie Price is believed to be up to. IVAs need to be approved by creditors representing 75% or more of the debt owed.
Where an IVA is completed successfully, the individual is released from the debts – though it will remain on their credit history for six years – but if they fail to keep up with the terms, the IVA may be terminated and they will be liable for their debts again.
However an IVA is not suitable for everyone – bankruptcy may be the best option in some cases, and those on low incomes with low levels of debt may be better in a DRO (Debt Relief Order).
Paul Barber says: “Debt can put enormous pressure on families and people’s mental health. Anyone worried about their financial situation should seek individual advice from a charity or qualified insolvency professional to ensure they choose the right option for their circumstances. There is light at the end of the tunnel.”