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A brief history of IVA’s

In 1977 it became widely recognised that the UK needed an alternative to bankruptcy. The government of the time commissioned a major review of the laws relating to bankruptcy, insolvency, liquidations and receivership. This review was published in 1982 and became known as the “Cork Report”. It helped to form the basis of the Insolvency Act 1986.

The Insolvency Act 1986 bought into effect the IVA or Individual Voluntary Arrangement as an alternative to bankruptcy. As originally envisaged, IVA’s still continue to work well for individuals who are struggling to repay a large amount of debt.

What is an IVA?

An IVA is a formal arrangements made between a debtor and their creditors. The debtor commits to make reduced but affordable payments towards the debt for a pre-determined period. This enables the creditors to receive a percentage of the overall debt that was originally owed to them. Monthly payments are usually made for five years, though in certain circumstances this period might be extended. These types of debt arrangements aren’t available in Scotland.

In addition significant equity in a home may need to be considered, but this is subject to a couple of important safeguards. The amount of equity would be based upon the home being re-mortgaged using a 85% loan-to-value re-mortgage. Only equity figures of £5000 or more (based upon an 85% loan-to-value re-mortgage having taken place) would be taken into account. If it is not possible to obtain such a re-mortgage, but equity would have existed on this basis, the IVA may be extended by a period of one year in lieu of the equity. If a re-mortgage on these terms were available, an individual in an IVA would not be expected to increase their existing monthly mortgage repayment amount over and above a realistic amount.

 An IVA is not a soft option in comparison to bankruptcy. It requires commitment and determination from the debtor to ensure the terms of the IVA arrangement are completed successfully. The benefit however is that upon successfully completing the terms of the IVA, any debt not repaid will be written off by the creditors.

An IVA must be set up by a licenced Insolvency Practitioner (who are typically employed by IVA companies). To propose an IVA to creditors a debtor needs to seek professional advice from an Insolvency Practitioner (IP) or debt adviser. Either should discuss the other debt solution options available (for example bankruptcy) as well as reviewing your financial situation in full. This is accomplished by completing an income and expenditure record. This record will establish how much the monthly IVA contribution towards the debts will be.

Things your IVA adviser should discuss with you

It is important, and in your interests, to be completely open and honest with the IVA adviser. The information that they are requesting is vital in order to be able to advise you properly.

They should wish to discuss with you:

  • Your current financial position.

  • The background to your financial position.

  • The bills and priority debts that you should continue paying.

  • Your secured creditors.

  • The pros and cons of other possible debt solutions.

  • The pros and cons of an IVA.

  • Likely creditor support (or otherwise) for an IVA.

  • The fees and costs involved in an IVA.

The IVA decision

If the IVA adviser and you decide that an IVA is the right debt solution, they can start to prepare the IVA proposal for your creditors. This will include details of all the debts, how and when the debts were built up, details of property and other assets, and a record of the amount that you are in a position to contribute towards the debts and IVA fees. It is important that you read and understand the IVA proposal itself. If there is anything you do not understand, do not be afraid to ask your IVA adviser questions.

The “nominee” stage

The Insolvency Practitioner that you choose is known as your “nominee” while preparing your IVA proposal right up until the point of the “creditors meeting”. This is the formal date upon which your creditors can decide whether to accept your IVA proposal.

Your creditors will almost certainly not meet in person. They will vote by post, email or fax. If 75% of your creditors (measured in terms of the amount owed to each) accept the terms of your IVA proposal, it will become legally binding on all of your creditors. The IVA will have become accepted.

As well as accepting the proposal in its’ original form, they creditors can request that a modification or modifications are made to the proposal. Modifications are a request from creditors to change the originally proposed terms of your IVA. They might include an increase in the monthly contribution, for example, if they believe that a higher monthly payment is affordable. If a creditor does request a modification your IVA adviser will contact you to discuss your acceptance or rejection to the modification.

The “supervisor” stage

Once the IVA is approved your Insolvency Practitioner will become your IVA “supervisor”.

As supervisor, your IVA company will carry out annual reviews of your case. This includes collecting your P60 and recent payslips to see if there has been a change in your circumstances. If your circumstances have improved it is likely that you will be asked to increase your IVA payment. They will send an annual report to your creditors every year in connection to your review and the status of your IVA. As supervisor your IVA company may also need to handle unexpected work that might include any creditor disputes, or working with your creditors if you become unable to maintain the originally agreed monthly contributions. Finally, your IVA company will distribute money to your creditors. These payments are known as “dividends”.

Equity (or the realisation of any other included assets under the terms of the IVA) may need to be released at some point during the IVA. This is usually handled around month 54. If the equity cannot be released into the IVA it may be possible to extend the IVA for a year in lieu of the equity contribution.

Upon successful completion of the IVA a “completion certificate” will be issued and the remainder of the debt written off.

Legal Status of an IVA

Once an IVA proposal has been approved it is then binding on all creditors, even unknown creditors (those who had not received notice of the creditors’ meeting). This assumes that any omitted creditors were not omitted deliberately.  However, once an unknown creditor becomes aware of the IVA, they are able to apply to the Court to challenge an approved IVA if their share of the debt would have been sufficient to prevent the IVA being approved in the first instance. The Court has the power to revoke the IVA. Whilst an IVA is in force, creditors who are bound by the IVA cannot take any debt recovery action against the debtor.  They must look solely to the IVA for repayment of the debts.

IVA fees and costs

The IVA proposal must include details of the fees and costs of the IVA company. These will be split into two parts, one fee for the nominee duties and one fee for supervisor duties.

The level of fees will affect the amount of money repaid to creditors under the arrangement as the fees will be deducted from the money that is paid into the IVA via your contributions.

Additional fees known as “disbursements” will be charged to cover costs associated with an IVA. For example a fee will be charged for an IVA to be registered, the Insolvency Practitioner will be charged for insurance, if there is a property involved a valuation fee may be charged and a fee will be charged for registering an interest in the property with the Land Registry.

All of these fees and charges should be paid for from the monthly IVA contributions.

Some Disadvantages Of An IVA

75% of your creditors (by debt value) must agree to the terms of your IVA for it to be accepted. They are not compelled to accept the terms of any IVA proposal. During the IVA there will be restrictions on your expenditure in order that you are able to contribute what you can reasonably afford to the IVA. The term of an IVA, and therefore these expenditure restrictions, is usually five or six years depending upon your circumstances. Only unsecured debts included within your IVA will have the balances written off at the end of the term and following your discharge from the arrangement. You will remain responsible for any other debts that you have incurred.

When you cease paying your creditors directly you are likely to fall into arrears (or fall further into arrears) with your accounts.

An IVA will have a very significant effect on a credit record which is likely to be similar to bankruptcy. Any previous IVA may also need to be declared on mortgage applications for many years after an IVA is completed even if it is no longer visible on a credit record. If it is possible to obtain an increased mortgage during an IVA, homeowners may be required to do so in order to release money to help repay their creditors. A mortgage obtained during an IVA is likely to be on less favourable terms than might otherwise be achieved (for example the interest rates may be higher). If a homeowner with equity is unable to re-mortgage during their IVA, the term of the IVA may be extended by one year.

Should your IVA fail it may lead to your bankruptcy. Public registers of all types of personal insolvency (including IVAs) are kept.

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