Ruth JacksView Profile
Individual Voluntary Arrangements (IVAs) have been around for over 30 years, and are used as a means of helping individuals avoid bankruptcy and possibly, the loss of their home.
The government passed the initial legislation in 1986, aimed at sole traders or partnerships that had run into financial difficulty, despite having a good core business model. Sometimes its not a problem with the business model, they simply needed time to navigate a cashflow issue, perhaps caused by a sizable bad debt.
Regarding sole traders and partnerships, English law does not differentiate between private and business debt. With the advent of credit cards for all, more IVAs have been used to help sole traders, as credit cards have been used to fund non-limited company’s with individuals being held personally liable.
As there is no room to differentiate between private and business debt for sole traders, credit card debt has become a major problem for sole traders. Sole traders will often use personal credit cards to cover business debt and vice versa.
So what is an IVA?
In simple terms, an IVA is a legally binding agreement between the individual and their creditors to repay some or all their debt over an agreed period, typically five years.
Although many IVAs see regular monthly contributions, they are, by nature, as flexible as the individual debtor’s circumstances. So, the agreement could be based on income from employment or a business, lump-sum reductions, payments from third parties – or a combination of these.
How is the IVA agreed?
An Individual voluntary arrangement must be arranged and supervised by a licensed insolvency practitioner (IP) – a qualified professional who specialises in dealing with debt-related problems faced by individuals and businesses.
The IP will put together a proposal based on the debtor’s information. It will outline how the financial difficulties have arisen and details of assets and liabilities. Additionally, it will outline details of anticipated income and outgoings, and based on this information, the offer of payment of part or all the debt.
If 75% of creditors by value, who choose to vote on the proposal agree to it, all creditors are contractually “tied into” the arrangement, irrespective of whether they voted for or against it.
If the individual is a business owner, they are left to run the business on a day-to-day basis. The Supervisor of the IVA – agrees creditor claims, collects the agreed contributions from the debtor and distributes funds to the creditors (after deducting agreed costs).
The UK labour market
In recent years, there has been a significant increase in the number of people moving away from traditional employment, and instead, becoming self-employed. So in November 2017, unemployment fell to its lowest level since 1975. This fall coincided with a growth in self-employment between 2001 and 2016; which jumped from 12% to 15.1% of the labour force.
In a nutshell, more people are becoming self-employed and working alone without employees. In many cases, it may be the result of being made redundant and having trouble finding alternative employment. Statistics also show they often earn less than employed people. Couple this with the inexperience some people have of running a business, and you have a recipe for financial problems.
As a result, those new business owners who choose not to incorporate, if faced with financial issues, may need to consider using an IVA as they were initially intended.
An Individual Voluntary Arrangement is a formal agreement between a debtor and their creditors, allowing them to repay their debts in monthly instalments. They were initially introduced to help insolvent sole traders and business partnerships. However, the increase in self-employment and the lack of limited liability has led to an upturn in IVAs
If you are facing financial issues and you are not a limited company, an IVA procedure could save your business, allowing you to protect your personal assets.