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How to go broke but not be a bankrupt: People overwhelmed by debt can spare themselves the humiliation of official insolvency, writes Sue Fieldman

THOUSANDS of people will face bankruptcy this year. They may lose their homes. Many will suffer it as a blow to their self-respect. The financial stigma is likely to haunt them for years.

In many cases, however, there is an alternative step, known as an Individual Voluntary Arrangement. The IVA is an agreement between debtors and creditors that allows the people in financial trouble to repay all or part of their debts over an agreed period.

An IVA is not limited to business debts. It may be equally appropriate when personal debts become too heavy to bear.

The big advantage of an IVA is that, unlike a bankruptcy, it is not advertised in newspapers. No-one other that creditors need know about it. Life, including running a business, can carry on very much as before.

In addition, an IVA is much cheaper than a bankruptcy. You can pay the fees of an IVA either up-front or during the course of the arrangement.

Steve Billot, of Levy, Gee and Partners, a firm of insolvency practitioners, said the costs of an IVA are typically 50 per cent lower than bankruptcy.

Lower costs, coupled with the debtor's ability to continue trading, gives the creditors a much better chance of receiving all or part of their money.

Mr Billot said 25 to 30 per cent of bankruptcies could be IVAs, saving homes, money, reputations and the ability to run businesses. 'The reason there are so few (an expected 6,000 this year) is because people do not know about them.' He added that IVAs were not usually advisable for debts of less than pounds 5,000.

'People in financial trouble often try to run away and hide,' said Mr Billot. 'Then someone makes them bankrupt and it is all too late. Yet, if they had addressed the problem at an early stage, they might have been able to salvage the situation.'

In simple terms, to set up an IVA the debtor must submit a proposal to the creditors, which includes a list of assets and their value, all the liabilities, a schedule of payments to each creditor and a number of other details. An Insolvency Practioner, usually an accountant, may help to prepare the proposal. If the arrangements appear viable, the IP calls a meeting of creditors, which the debtor attends. The creditors have the opportunity to modify the proposal.

Creditors representing at least 75 per cent of the debt will have to agree to the IVA proposal for it to be binding. They will then appoint a supervisor to monitor the arrangements.

'Virtually anyone can benefit from an IVA,' Mr Billot said. 'The only exceptions are individuals who are likely to conceal assets or people who cannot quantify their liabilities, such as Lloyd's Names.

The Society of Practitioners of Insolvency, 071-600 3375.

The leaflets 'IVAs' and 'Ten Pointers to Avoiding Bankruptcy' are available free from Levy, Gee and Partners, 56 Dingewall Road, Croydon CR0 OXH.

(Photograph omitted)