Filing for Bankruptcy Increases, But IVA's Down

The Popularity of the Individual Voluntary Arrangement Declines

Jun 29, 2009

Rising personal debt has led to an increasing number of UK consumers filing for bankruptcy. Why is the popularity of Individual Voluntary Arrangements (IVA's) falling?

The level of personal debt has become unsustainable for many families. According to Credit Action, the average household debt now stands at £9,280, excluding mortgages. An increasing number of consumers are opting to deal with their financial difficulties by filing for bankruptcy rather than selecting an Individual Voluntary Arrangement (IVA).

Filing for Bankruptcy on the Increase, But Individual Voluntary Arrangements Fall

The number of people filing for bankruptcy has now reached a record of 67,428. Contrarily, just 39,116 people entered an Individual Voluntary Arrangement. This means that a total of 106,544 individuals became insolvent over the course of 2008 in order to escape serious debt. Why is this debt solution becoming more popular?

Secured Debts Not Written-off by an Individual Voluntary Arrangement (IVA)

According to PriceWaterhouseCoopers (PWC), the Individual Voluntary Arrangement is now less popular due to the number of second mortgages. Whilst credit cards, personal overdrafts and unsecured loans can be included in an IVA, loan secured on property cannot be written-off. Falling property prices and negative equity have resulted in more people filing for bankruptcy as they have no property to protect.

Job Insecurity Behind the Record Number Filing for Bankruptcy

The global economic downturn has resulted in unemployment and increased job insecurity. A requirement of the Individual Voluntary Arrangement is a regular monthly payment for a period of 60 months. Not maintaining this payment may result in the Insolvency Practitioner filing for bankruptcy on behalf of the creditors. This can happen at any time during the IVA.

Individual Voluntary Arrangement (IVA) Criteria More Strict

Lenders now expect a higher percentage of personal debt to be cleared by way of a dividend payment. Whilst an Individual Voluntary Arrangement (IVA) was widely marketed as clearing up to 75% of serious debt, this isn't necessarily the case. This has led to more consumers filing for bankruptcy than was previously the case.

Filing for Bankruptcy as No Property to Protect

Plummeting house prices have led to a higher number of homeowners filing for bankruptcy. Negative equity has meant that there is no valuable asset to protect, hence the reason fewer people are opting for an Individual Voluntary Arrangement (IVA). With no asset to protect and a shorter period before the debtor is discharged, it is a more appropriate way to deal with financial difficulties.

Until the housing market recovers, there are likely to be more consumers filing for bankruptcy in order to escape any personal debts. However, an Individual Voluntary Arrangement (IVA) provides an excellent way of keeping the family home, protecting a professional status and avoiding publicity.

Boyden, Pat. (April, 2009). "Britain is broke - personal insolvencies on the way up." PriceWaterhouseCoopers.

Disclaimer: This article in no way attempts to give legal or tax advice. One should consult a licensed attorney, tax advisor, or other qualified professional.

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