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How an IVA could annul bankruptcy

We always advise that those in financial difficulty seek advice as soon as possible.  Ideally we would see clients when they first find that they can not pay debts and have creditors chasing.  When debt collectors start calling this should be a clear sign of financial distress and be a prompt to seek advice.  This is not always the case, some will wait until a bankruptcy petition has been received and then seek advice.

At this stage we are still able to help and there are still options available, the process just becomes a bit more difficult.  What happens though if a bankruptcy order has already been made?  Whilst not ideal there are still some limited options available.

Being declared bankrupt has serious implications, including the potential sale of the matrimonial home, the sale of all assets and restrictions on being able to be a director of a company.  Depending on individual circumstances, for some these restrictions will result in a loss of business and difficulty in finding a new home.

This situation arose recently when a client approached us for advice.  He had been declared bankrupt and had not previously sought advice about the implications of this, he therefore did not appreciate what bankruptcy would mean to him personally and relied upon the hearsay of friends that had encountered bankruptcy previously.  Following a meeting with the Official Receiver he very quickly realised what the implications of bankruptcy actually were.

The client ran a business as a limited company and had equity in the home he owned with his wife.  In bankruptcy there would be a significant recovery from his share of the equity.  The costs of bankruptcy including the 15% fee on all realisations, together with the bankruptcy fee would have been significant, diluting the dividend available to the creditors.  Due to the nature of his business he would find it difficult to trade as a sole trader in bankruptcy and therefore would have to find a new, lower paid job.  This would result in the debtor having no surplus income and therefore the home would be the only realisation.

In this case it appeared that it may be in the best interest of both the client and his creditors for the bankruptcy to be annulled.  This can be achieved by an Individual Voluntary Arrangement (IVA) being proposed and accepted by the creditors, and then an application for the annulment being made.

In an IVA the costs would be significantly lower and therefore the return to creditors would be increased from this.  As well as this, the client would be in a position to be able to continue trading and drawing funds which would result in him having excess funds left each month after all expenditure was paid.  This excess income was to also be included in the IVA, further increasing the dividend the creditors would receive.

Proposals were therefore drafted and sent to all creditors setting out that the IVA was in the best interest of the creditors as it would lead to a higher return and at the same time it was in the interest of the debtor.  Through the IVA the home would be sold on the open market at market value, increasing the share of the equity that the debtors wife would receive.  This then allowed the debtor and his wife to find somewhere new to rent and in time to buy a new property.  The debtor was also able to trade his business and therefore keep his livelihood for now and for the future.

Following the acceptance of the IVA proposals by the creditors, steps were taken to annul the bankruptcy.

Although not ideal, we were able to find a solution for the client which was in both his best interest and the best interest of the creditors.  If advice had been sought earlier we could have prevented a lot of the issues caused by the bankruptcy, but even at the late stage we were consulted we swere able to find a solution to the issues faced.

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