Why, when we read the papers, do we come across such different figures for insolvencies?
One day we read that almost 34,000 people in England and Wales were declared insolvent between July and September - but the next we read that there were under 14,000 bankruptcies. Why is that?
The answer lies in the terminology: there's a big difference between insolvency and bankruptcy. 25 years ago, that wasn't the case, but a lot has changed since 1986, when the IVA - Individual Voluntary Arrangement - was introduced as an alternative to bankruptcy. (And last year, it all changed again, when people considering insolvency were given a third potential option, known as a DRO (Debt Relief Order).)
So these days, while the insolvency statistics do tell us how many bankruptcies there have been, they also reveal how many people have entered an IVA or DRO.
Bankruptcy, IVA, DRO - they're all insolvency procedures
Unless you know the details, you'd be forgiven for wondering what difference it makes how someone actually enters insolvency. In fact, it makes a big difference: the different insolvency procedures work in very different ways to help people dealing with different problems.
We have limited space here, so rather than going into a long-winded comparison of all three (bankruptcy, IVA and DRO), here's a run-down of the most important facts about just one of them: the IVA.
IVA - what it stands for
First of all, IVAs are about agreement. The 'A' stands for 'Arrangement' as it's basically a legally binding contract between a borrower and their unsecured creditors (providers of things like credit cards, unsecured loans & store cards - not mortgages and secured loans).
Secondly, entering an IVA is a choice, which explains the 'V' for 'Voluntary'. People choose to enter an IVA because they believe it's more appropriate than any other way of tackling their debts, such as bankruptcy or a debt management plan.
Third, an IVA is an 'Individual' (i.e. tailor-made) agreement. The individual's Insolvency Practitioner (IP) will need to know everything about their situation so they can work with them to draw up an IVA proposal, which tells the creditors how that particular IVA could work - and how it could benefit them as well as the individual.
So that's the acronym explained. Now a look at the process, the obligations and the benefits.
IVAs - the process
Once the IVA proposal has been created, the creditors get to review it and decide whether to accept it, reject it, or request changes to it.
The IVA can only go ahead if the terms are accepted by 75% of voting creditors by debt value (i.e. by creditors who, between them, own 75% or more of the debt involved). If they request changes to the terms first, it's up to the individual to decide (with their IP's help) whether to accept those changes or abandon the idea of an IVA altogether.
If it's accepted, the IVA can begin.
Some IVAs involve a single 'lump sum' that the creditors accept as a 'final settlement' of the debts.
The majority, however, involve monthly payments made over a period of (typically) five years, which means they'd be very unlikely to suit someone with an irregular / unreliable income.
Those monthly payments would be calculated to be affordable after the individual has taken into account their essential costs (from their food costs to their mortgage/rent and utility payments).
The individual may also be required to release equity from any property they own, so they can pay their creditors more of what they owe them.
As long as they fulfil their side of the agreement, their unsecured creditors won't be able to take any action against them (such as trying to make them bankrupt). They'll also write off the outstanding unsecured debt once the IVA has reached a successful conclusion, meaning the individual won't have to repay more than they were able to during the course of the IVA.
Insolvency - not an inevitability
Finally, a note about avoiding insolvency in the first place.
If someone's finances have reached the point where they simply can't repay what they owe, insolvency might be inevitable, but that doesn't mean everyone with debt problems will end up insolvent.
As they say, a stitch in time saves nine: plenty of people will face up to their debt problems earlier on and find that they could address them by entering a debt management plan, for example, or remortgaging their house. The important thing is to get some debt advice - and the sooner they do this, the less likely they are to discover that insolvency really is the only way forward.