IVA's/Individual Voluntary Arrangements
There are various forms of insolvency in the UK.
Insolvency in its basic form, is when you can no longer service the debts or liabilities you have. Your liabilities exceed your assets or what you are worth.
In the UK insolvency can take the form of someone going bankrupt, entering into a Debt Relief Order, Administrative Order, and an IVA/Individual Voluntary Arrangement.
IVA’s or Individual Voluntary Arrangements were born in the UK out of the Insolvency Act of 1986. Part VIII of the Insolvency Act of 1986 establishes IVA’s, and “constitutes a formal repayment proposal presented to a debtor’s creditors via an Insolvency Practitioner or IP”.
IVA’s are a formal agreement between the debtor and all their unsecured creditors which overrides the original agreement or contract for the debt or loan. It in essence rewrites the terms of the loan or debt.
IVA’s are only for unsecured debts, loans, credit cards, overdrafts, catalogues, etc.
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How An IVA Works
The basics of an IVA are that the debtor makes payments of what they can afford into the IVA for a period of five (5) years, during which the creditors freeze the accounts to all interest and charges. If the debtor has a property, they can be required to release a portion of any equity in the property to the IVA in the fifth and final year. After the five (5) years, any remaining balances on the accounts is written off and the debtor is out of debt and starting fresh.
In order for a debtor to qualify or have their debts considered for an IVA, they do need to be working and have the ability to fund or pay the IVA. They also need to have the minimum level of debt required for an IVA; this can vary but on average needs to be £12,000 to £15,000 of debt between two (2) or more different creditors. (There are some IVA practitioners that will work with borrowers who have less than £12,000 in total unsecured debt).
Who Sets Up An IVA
IVA’s are set-up and administered by Insolvency Practitioners or IP’s. They are the ones that complete the forms and proposals and act as a mediator so to speak, between you and your creditors.
Once it has been established that you have the level of debt required to do an IVA, a detailed income and expenditure form is completed outlining all your income and expenses. This form shows your rent or mortgage, council taxes, food, petrol, electricity, gas, TV licence, insurances, cable, Internet, etc, all your monthly bills minus your debts. It also shows all your wages, tax credits, any benefits, you receive. Once the math is done subtracting your bills from your wages the amount that is left, the surplus income, is what is considered for payment into an IVA.
There is a minimum required payment to an IVA, this is based on the level of debt you may have and also what the final return may be to your creditors. In most instances creditors are looking for a 25% return as a minimum. This means that they hope to get 25% of the total balance owed to them back during the course of the IVA.
If for any reason you do not meet the minimum payment required for an IVA, there are other debt options which we will look at later on.
Once the payment amount you can afford is calculated, the IP puts together a proposal to be sent to all your unsecured creditors. Only unsecured debts can be included in an IVA. Your creditors then vote as to if they will accept the proposal or not. As long as the majority, 75%, of your creditors agree to the IVA, or the creditor with the majority of your debt agrees, again 75%, the proposal is binding to all your creditors.
You then begin your monthly IVA payments, your creditors freeze the accounts to any new charges and interest.
If you have property with equity, it will be outlined in the IVA that a portion of that equity will be released and paid into the IVA in the fifth and final year to in essence buy-out the IVA. This equity release is usually done through a re-mortgaging of the property.
By entering into an IVA you are asking for assistance in paying back your debts, which is similar to bankruptcy; both an IVA and bankruptcy are forms of insolvency, and as such anyone bankrupt or in an IVA can have their names placed on the insolvency register on the government’s insolvency web site.
Fees For An IVA
There are fees for an IVA, the fees are to the IP for the set-up and administration of the IVA. These fees can be high in some instances, but these fees come out of the monthly payments the debtor makes into the IVA. There are no out-of-pocket costs to the debtor for the IVA, and should the IVA fail, the debtor owes no fees. These fees are transparent to the creditors, and the creditors have agreed to the fees charged.
Once the IVA is voted on and agreed, the debtor begins their IVA payments. The IVA can be reviewed on an annual basis to see if any changes have taken place. Should the debtor have a change in their circumstance, such as a pay rise, windfall of money, etc, they are required to report this to the IP, who in turn may look at increasing the IVA payments.
Ending An IVA
Once a debtor makes their IVA contributions for the full five (5) years, the creditors write off the remaining balances and the debtor is debt free. If there is property involved, then a re-mortgage or some means to release the agreed upon equity must take place to buy-out the IVA. If for any reason a re-mortgage or equity release cannot be arranged, then the IP can prolong the payment period for the IVA even up to an additional 12 months.
If there is not sufficient equity in the property, there is no need to extend the IVA. It will be completed at the end of the five years.
If no payments are made into the IVA, usually for a period of three (3) consecutive months, the IVA can be deemed as failed. Once an IVA has failed your creditors can then begin the process of attempting to collect the debts again. Once an IVA has failed, the debtor can try to have the IP set-up a new IVA or look to other debt solutions.
Full and Final Settlement
A Full and Final Settlement IVA is a one-off payment to settle the debts owed.
An example may be that an individual owes £20,000, but has or is receiving a lump sum of money, say £10,000. This is offered to the creditors as settlement on the accounts, settling them for less than what was originally owed.
There can be some issues in doing these types of settlements, as if the debtor still has the ability to make monthly payments after the lump sum, the creditors may vote to accept the settlement amount, in addition to monthly payments for a period of time. They would do this to minimise their losses.
So what debt options are there for someone who cannot do an IVA or has an IVA that has failed?
Bankruptcy is always an option, however for some people with property it is not a good option as they may lose their property.
A Debt Management Plan is a suitable alternative to an IVA for those that may not qualify or whose IVA’s have failed for whatever reason.
Debt Management Plans are not as formal as IVA’s, and can take longer to complete, but can also offer more flexibility.
Overview Of An IVA and IVA Rules
- Formally binding agreement with your creditors
- The accounts are frozen so no new interest or charges are accruing
- A way to preserve property as in bankruptcy you may lose the property
- Is a five (5) year term, at the end of the five years you are debt free
- Need a minimum of £12,000 – £15,000 of debt (some IVA providers will accept lower amounts of debt)
- Creditors reduce the balances on the accounts, you pay back a pence on the pound percentage
- A formal arrangement with your creditors, they agree to accept the payments you can afford and you are not chased for any additional payments
A Few Points to Consider About IVA’s
- Since it is a formal agreement it must be adhered to for the full term of the agreement
- Any increase in income or windfalls need to be reported and can be taken for the IVA
- If you have property and cannot re-mortgage or release equity through other means the IVA payments can/may be extended