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IVA (Individual Voluntary Arrangement)

About an IVA

An IVA is an alternative to bankruptcy introduced by the government as part of the Insolvency Act 1986. It enables an individual in debt (debtor) to make a proposal to the people they owe money to (creditors) to reach a settlement. Should the proposal be approved by a majority of the creditors, the IVA then stands as a contract that binds all parties and prevents any them taking any further action.

A standard IVA will offer to pay whatever is affordable monthly into a fund over a five year period, and after that the debt is cleared. This can be the case even if the creditors end up getting less than 30% of their debts repaid, and so monthly payments into an IVA can be as little as £250 per month. Payments are based on what an individual or household can actually afford and are normally over £300-£400, but still tends to be significantly less than the existing minimum payments on credit cards and loans. Money inside a safety ring.

IVA’s are becoming an increasingly popular choice for the over-indebted in the UK. Finance Affiliate can put you in touch with someone who specialises in advising on, setting up and supervising IVAs.

How does it work?

The IVA was designed initially to be a more convenient means for processing individual insolvency cases without incurring the excessive costs and court time involved in bankruptcy. As such there are many elements that are similar to bankruptcy, but the process is simpler and the outcome less severe.

So for example, under either bankruptcy or IVA they are the same assets and income that are up for distribution to the creditors; it is just that it is the individual who proposes what will be paid into an IVA, whereas under bankruptcy the magistrate at the hearing decides what the outcome will be.

The application and set up process takes around 4-6 weeks from the point of application, including activities such as fact finding, collection of evidence, drafting the IVA proposal, reviewing and signing, sending to creditors and voting. The most professional organisations will do the majority of the work themselves and will only require the debtors for minor activities such as providing evidence and reviewing and signing the documentation.

The resulting proposed IVA will be based on what the debtor can realistically afford to pay over a five year period. Normally it will be made up of sixty monthly payments at an agreed level, however it can also include lump sum contributions from, for example, a release of equity from a property.

The approval of an IVA is dependent on receiving a 75% majority of approving votes from the creditors. Most lenders have standard terms for what they will accept, including normally a reduction in the overall level of debt by as much as 75%. Most good insolvency practices are quite familiar with these terms.

Once approved a standard IVA will run for a five year (60 month) period. During this period payments are made on a monthly basis into a fund that the Insolvency Practitioner governs. The funds that accumulate in this account are used to pay off the creditors. This fund is also used to pay the fees of the Insolvency Practitioner.

The payments into the fund are supervised by the Insolvency Practitioner. There are normally payslip reviews approximately every quarter, and a full review of the debtors situation every twelve months.

During the period of an approved IVA the creditors are required to freeze all interest on the debts, and they are prevented from pursuing the debts and prevented from taking any legal action related to these debts.

At the end of the five year period, assuming that the IVA has been satisfactorily completed, all of the debts are cleared.

What happens once the IVA is set up?

Once the IVA is approved, the Insolvency Practitioner (IP) will take on the role of Supervisor for the five year period. This will mostly involve ensuring that the monies are handled correctly and that the appropriate payments (or dividends) are made to the creditors.

Monthly payments from income plus lump sum contributions

It is also possible to make lump sum contributions for example from the sale of a car or the remortgage of a property.

At the end of an IVA

At the end of the five year period, assuming that the IVA has been satisfactorily completed, there is final dividend payment made to the creditors and the IVA is closed down.

  • Monthly payments are stopped
  • The bank account is closed down
  • All parties are informed of the successful completion

Dealing with a property in an IVA.

Under bankruptcy, if an individual owns a property it is very likely that they will be forced to sell it. Under an IVA the individual is not forced to sell their property, however if there is an equity available in the property (i.e. the value of the property is greater than the total of the mortgage and any other loan secured against it), then the creditors will look to release this equity and contribute it as a lump sum towards the IVA.

There are, however, exceptions to this. For example:

  • The equity is nil or negligible.
  • There are redemption penalties, or similar, which would make the sum raised nil or negligible.
  • The nature of the borrowing against the property is such that it is not possible to release the equity.
  • The payments from income alone are enough to satisfy the creditors.

In these exceptional circumstances it is possible to propose that no lump sum be paid from the property.

Full and final settlement without payments from income

There are certain situations where the individual is able to raise a significant lump sum, but unable to make monthly payments from income. For example, they may be able to remortgage their property or sell off an investment product. In this situation it is possible to offer Full and Final Settlement from a one-off lump sum.

The Approval process

As an outline it can take between four and six weeks to set up an IVA, normally based on how quickly the individual can provide information such as copies of statements and payslips. This is known technically as the 'Nominee' process, as it requires a named Insolvency Practitioner to put forward the proposal. Each insolvency practice will have a slightly different process and will use slightly different templates, but in general they all follow a similar pattern.

  • Fact Find
    An interview either face-to-face or over the phone to establish a clear understanding of the situation, and confirm that an IVA is the most suitable approach.
  • Information collected includes: household information, background to the debt, creditors, assets, monthly income, your monthly expenditure.
  • An IVA application can be made either as an individual (single) or as a household couple (joint). The latter does not require the couple to be married.
  • Collect Supporting Evidence
    • The insolvency practice is required to collect evidence that shows that what they are being told is true.
    • This due diligence makes sure that the proposed IVA is fair to creditors. i.e. that the amount paid each month is the full amount that the individual can afford.
    • But it also makes sure that the individual can afford the payments. i.e. That they are able to live without discomfort, and that they will be able to keep up the payments for five years.

Evidence includes:

  • Evidence of debts (e.g. statements from each creditor)
  • Proof of income (e.g. payslips)
  • Proof of expenditure (e.g. rent, monthly bills, etc.)
  • Value of assets (e.g. property valuation, make/model/year of car, etc.)
  • Formal identification (e.g. passport, drivers licence)
  • Draft IVA Proposal
  • Based on all the information gathered a proposal document is drafted by the insolvency practice.
  • This document may be several pages long and is often in several parts (schedules).

There are a few basic types of IVA although most of them are very similar

  • Single (one applicant) or Joint (two applicants)
  • Monthly payments only (normally 60 months)
  • Lump sum only (normally from remortgage)
  • Monthly payments plus lump sum

Finally

  • The debtor needs to read the IVA proposal and sign it once they are totally comfortable with the contents.
  • Proposal sent to Creditors
  • Once the IVA proposal has been signed by both the debtor and also by the Insolvency Practitioner who is acting as the Nominee, then copies are sent to each of the creditors.
  • Each copy is accompanied by any required background information and a covering letter from the Insolvency Practitioner.
  • The creditors are asked to read the proposal and vote on whether to approve it or not. They are also asked to provide proof of the claim they have for the debt.
  • Copies are also sent to the local county court and to the insolvency service.

Will my credit rating be affected?

By entering into a debt solution, your credit rating may be affected. Even though you may come to an amicable agreement with your creditors to reduce your payments, reduced or missed payments can be recorded by credit agencies to reflect that you have not kept up with the original repayment schedule.

Pros

  • Creditors who vote against your proposal are still bound by it.
  • Creditors whose lending is unsecured can’t take any further action.
  • Interest is usually frozen as long as you keep up your payments.
  • Your insolvency practitioner will help you prepare your proposal, including agreeing the level of your household and personal spending based on guidelines acceptable to creditors.
  • Many insolvency practitioners will allow you to pay their fees for preparing your proposal monthly, as part of the IVA.
  • You make only a single payment each month or quarter. Your insolvency practitioner is responsible for administering and distributing your payments.
  • The terms of an IVA will usually enable you or your spouse or partner or a relative to make arrangements to buy your share of the net worth of your home or to make extra payments, rather than the home having to be sold. This may be done through a remortgage or a loan. (Net worth means its value after any debts secured on it have been paid.)
  • On completion of the IVA, the balance of what you owe your creditors is written off.
  • You may be able to continue running any business you have.

Cons

  • Your IVA is entered on a public register.
  • The insolvency practitioner may require payment in advance for preparing your proposal and getting your creditors’ agreement.
  • If there is some equity (value) in your home after taking account of the mortgage(s) on it, you will probably have to pay for your share, usually in the fifth year of your IVA, by remortgaging the property. If you can’t get a remortgage, you may have to continue making monthly or quarterly payments from your income, for up to another year.
  • If your circumstances change, and your practitioner can’t get creditors to accept amended terms, the IVA is likely to fail. You will then still owe your creditors the full amount of what you owed them at the start, less whatever has been paid to them under your IVA.
  • If your IVA fails, you may be made bankrupt.
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