IVA IntroductionThe Individual Voluntary Arrangement (IVA) was introduced under The Insolvency Act 1986 as an alternative to bankruptcy. It is classified as a negotiated debt reduction solution because as part of the arrangement the creditors agree to write off a percentage of the debt owed to them.
IVA Key FactsAn IVA is an agreement between the debtor and his/her creditors (people they owe money to) to pay all or part of their debts.
- Debtors make regular contributions to an authorized debt specialist called an “insolvency practitioner” (IP). The IP shares this money out between creditors in accordance with the terms of the IVA.
- There is no maximum or minimum level of debt and no maximum or minimum level of repayments, except what is acceptable to creditors.
- An IVA usually ends when the agreed amount has been repaid.
- For IVAs to be accepted, creditors who hold more than 75 percent of your debt (who vote), must agree to it. The IVA will then apply to all creditors, even those who objected to it.
The Features of an IVA
- An Individual Voluntary Arrangement (IVA) is a formal and legally binding agreement between the debtor and his creditors. It is for the debtor to make reduced payments in order to pay off a percentage of what he owes them.
- It is an alternative to bankruptcy.
- The IVA usually lasts for 5 years.
- Any remaining debt at that time is then written off by the creditors. This can be as much as 75%, but the industry average at the moment is around 69%.
- Due to its formal nature, an IVA has to be set up by a licensed professional called an Insolvency Practitioner (IP).
- Prior to acceptance of the IVA the role of the IP is of a “nominee”, i.e. they are nominating the debtor as a suitable applicant for the IVA.
- When the IVA is accepted the IP’s role becomes that of supervisor, monitoring the IVAs progress and ensuring that the terms and conditions that were agreed to at the creditors meeting are properly adhered to.
- The creditors pay the IP to manage the IVA on their behalf. During the course of the IVA the debtor’s contributions go into a bank account opened on his behalf by the IP. Once the payment has gone into this account it becomes the property of the creditors. The money in this account will be shared between the creditors at intervals by the supervisor after he has retained a percentage of this in respect of the fees incurred. Therefore the IP’s fees are paid “to the detriment of the creditor”.
- To be able to apply for an IVA the debtor must be able to offer a reasonable monthly contribution to the creditors. However, for a PCIVA the debtor must owe money to at least 3 separate creditors. The monthly contribution will vary depending on the amount of debt they have but as a guide, they will usually need to be able to afford at least £200/month (some IVA providers are able to offer an IVA where the debtor can afford as little as £100/month).
- Normally any unsecured debts can be included within an IVA. These include, but are not limited to:
- Store cards
- Credit cards
- Personal loans
- Outstanding balances after home or vehicle repossession (shortfalls)
- Business loans for which he is personally liable
- Personal debts to the Inland Revenue and VAT
- Some debts cannot be included within an IVA. These include:
- Secured debts such as a vehicle HP or mortgage arrears
- Debts such as rent and council tax arrears
- Fines (such as parking offenses)
These will normally have to be paid and provision for the repayment of these debts will need to be made in the debtor’s financial statement.
The Benefits & Implications for the Debtor
- An IVA will last for a fixed period of time, normally no longer than 5 years.
- Once the IVA is agreed, creditors are no longer allowed to demand payments from the debtor or contact him either by telephone or letter.
- Once the IVA has been agreed, creditors cannot add further charges or interest to any of the accounts covered by the arrangement.
- The debtor’s monthly contribution to the IVA is based on what they can afford to pay after allowing for their living expenses.
- An IVA is legally binding on all the creditors even if they voted against accepting the proposal. If of those who vote, 75% by value of his creditors are in favour of the proposal it will be approved.
- Creditors are not allowed to take further legal action against the debtor as long as they stick to the terms of the arrangement.
- An IVA is a private matter between the debtor and his creditors. There will be no publicity in the local papers.
- Regardless of the debtor’s profession e.g. doctor, solicitor or accountant there will be no adverse effects to the debtor’s job.
- Upon successful completion of the IVA the debtor will be debt free even though he may not have actually paid off all of his debts in full.
- The debtor will not be forced to sell their property in an IVA.
- If the creditors don’t agree to the IVA, the debtor still has the option of bankruptcy or an informal arrangement with his creditors.
- If during the IVA the debtor’s circumstances change for the worse and they cannot maintain the agreed payments, the IP can ask the creditors to agree to vary the terms of the proposal. If up until that time, they have maintained their payments without any problems the creditors may be inclined to accept this.
- If any creditor who votes against the IVA represents more than 25% in value of the total debt owed the IVA will fail.
- Although the debtor won’t usually have to sell their property, they will be required to release a portion of the equity for his creditors by re-mortgaging in the last year of the IVA. Under the new IVA Protocol this would normally be after month 54. If the debtor is unable to obtain a re-mortgage, the IVA will instead be extended by up to 12 months.
- The amount of the equity to be released will be based upon affordability from income and will leave the debtor with at least 15% of his equity in the property. Where it is appropriate to re-mortgage the property through a repayment mortgage (as opposed to interest only), the specific limits will be:
- Remortgages will be to a maximum of 85% LTV
- The incremental cost of the re-mortgage will not exceed 50% of the monthly contribution
- There will be a cap on the total equity release to not exceed 100% of the remaining outstanding debt.
- It is the debtor’s responsibility to make the agreed payments to the IP for distribution to his creditors.
- It is the debtor’s responsibility to co-operate with their supervisor e.g. by making himself available for periodic reviews of the IVA and supplying documents, e.g. proof of income on these occasions.
- It is the debtor’s responsibility to inform their supervisor as soon as they can of any change in their circumstances.
- It is the debtor’s responsibility to contact the credit reference agencies when they have completed his IVA in order to have their credit file updated.