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A growing number of people face insolvency as increasing household bills, rising interest rates and consumer spending outstrip incomes. Individual Voluntary Arrangements should be considered before bankruptcy.

The Tate Gallery has a fine moralising Victorian painting called The Last Day in the Old Home. Painted by Robert Braithwaite Martineau in 1862, it shows a family forced to sell the ancestral home thanks to the irresponsible conduct of a spendthrift. Objects connected with racing and gaming are in evidence. An auctioneer's catalogue shows that everything must go. The spendthrift shows his son how to swirl brandy in a glass as his wife reaches out in despair and the family lawyer explains the details to his mother.

Times change, but the problems of debt remain. Today's debtor is likely to have been hit by school fees, consumer goods and easy credit, or by the rising cost of gas, electricity and council tax, rather than by the form-book and dice. Many do indeed have to sell their homes, and the bankruptcy rate is rising.

For many, however, there is an alternative to selling up or going under. An Individual Voluntary Arrangement is a formal agreement, made through the court and binding on the creditors, which allows a debtor a period to clear the debts by fixed instalments.

Procedure

The IVA is handled by an Insolvency Practitioner who makes a proposal to the creditors collectively for repayment over a period. If the holders of 75% of the total debt agree to the IVA proposal, the rest are bound by it.

The debtor is protected by an Interim Order to give the Insolvency Practitioner ("the Nominee") time to put the Proposal together.

The Nominee files a Report at court which sets out the debtor's proposal and the Nominee's comments on it.

A notice is served on the creditors giving the time and place of a meeting as well as the Proposal and Insolvency Practitioner's report; the meeting must be within 28 days of the hearing of the Nominee's Report.

The creditors vote on the Proposal and the IVA goes ahead if 75% of them agree to it.

If there is no agreement then the IVA fails and any creditor can petition for bankruptcy. If the creditor does not keep up the payments, there may be a modified Proposal. If this is not acceptable then a creditor may petition for bankruptcy.

Implications

An IVA usually involves the creditors getting all their money eventually -that is why they may be willing to vote for it. Bankruptcy usually results in a loss for the creditors and the bankrupt cannot be pursued beyond the end of the bankruptcy.

A bankrupt is, however, subject to restrictions - he cannot be a company director or an MP and cannot get credit beyond ?500 without the consent of the Official Receiver and these restraints can last for up to 15 years. The Insolvency Practitioner on an Individual Voluntary Arrangement can often get a more flexible agreement from the creditors than bankruptcy allows, including saving the family home - the IVA is generally predicated on an assumption that the debts can be paid out of future income.
Costs and Caveats

The Insolvency Practitioner must be paid his fees, which may be several thousand pounds depending on what must be done. Insolvency Practitioners are in business to make money and there are differing standards, as well as differential fee rates, between firms of Insolvency Practitioners. The cheapest is not necessarily the best. A good Insolvency Practitioner will give practical and realistic advice and will only put forward a Proposal which is both achievable and likely to appeal to 75% of the creditors.

We work with firms of Insolvency Practitioners who can be trusted in this respect and would be pleased to give you initial advice and to put you in touch with a suitable Insolvency Practitioner.

Do go and see the Robert Martineau painting at the Tate, or find it in their very good online gallery. You may find it here. The one to look at is not the feckless father nor the despairing mother, but the calm solicitor. One has the feeling that his firm has acted for this family for generations and will continue to do so despite their present misfortunes. Judging by the way the son is eagerly copying his father's ready way with a brandy glass, the family may need some good advice.

To speak to a lawyer about insolvency, Individual Voluntary Arrangements or related matters, telephone Felix Appelbeon 020 7242 7000

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