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Fees and Payments

Insolvency Practitioner Fees

Most of the leading Insolvency Practices in the UK now do not charge fees for setting up IVA’s, instead they agree with the creditors to take their fees from the funds paid into the IVA.

Hence, in addition to the distributions to the creditors, the IVA funds need to cover the Insolvency Practitioner's (IP's) fees and expenses. It is normally understood that it is the creditors who agree how much of the IVA fund can be used to pay for the IP to set up the IVA and supervise it for a period of five years. As a guideline IP fees range from £4,000 to £15,000 based on factors such as the number of creditors or the size of the debt.

To some people these IP fees seem at first to be quite high. However an Insolvency Practitioner is a highly qualified and experienced role and there is a significant amount of work to do to set up the contract and supervise it for a five year period. Equally, these fees tend to be less than the court costs and Official Receiver fees involved in a bankruptcy. Hence, this is presently the most economical way to resolve the situation.

Creditors will reject an IVA if they see that the majority of the funds paid into it are going towards the Insolvency Practitioner's fees. As a guideline, at least 60% of funds paid into an IVA must be paid towards the creditors.

Bank account and regular payments

It is normally the case that a new bank account is set up specifically for each individual IVA. The agreed payments are made into this account normally on a monthly basis using either a standing order or a direct debit arrangement.

This new bank account is set up and controlled entirely by the IP. Having an individual bank account enables the IP to keep these funds separate from other IVAs, and allows him or her to simply manage payments in and out of the account.

Payment reconciliation

The IP will check each month that the correct amount of funds have been paid into the account. It is very important to keep up payments into the IVA once it has been approved.

Making a lump sum payment

If the IVA includes a lump sum payment, there will usually be a specified date by which this payment needs to be made, for example 3-6 months after the approval of the IVA.

This lump sum also needs to be paid to the IP who will normally add it to the funds in the individual bank account. When making a large lump sum payment it is worth contacting the IP specifically to discuss how the payment should be made (e.g. by cheque or by electronic transfer).

What happens If I miss a payment?

Once the IVA is set up it is important that it is adhered to until it is fully satisfied. There are quite standard terms now in most IVAs that specify that the individual should be made bankrupt if they default on the terms of the IVA.

For example, many IVAs specify that if three payments are made late, then this will count as a default on the IVA. These three payments do not have to be consecutive, they could happen at any stage during the IVA.

Contact the IP urgently if there is difficulty making a payment. It is better to have acted helpfully than to have hidden from the issue.

Periodic income checks and quarterly payslip review.

It is standard that an IVA will require the IP to check the income of the individual on a regular basis. In some cases this will require the individual sending through a copy of their payslip each month, in other situations the IP will review payslips every three to six months.

The purpose of this exercise is to check that the IVA payments are affordable, and whether the amount needs to be increased or decreased.

If the monthly amount received from income increases significantly it is possible for the IP to request a higher monthly payment. Often this increase will typically only be 50% of the increase to the net monthly income. For example, if an individual's net monthly income increased by £150 then the IP might request an extra £75 to be paid into the IVA each month.

Annual review process

It is also standard that the IVA will require the IP to review each case on an annual basis. This will include a run through of the individual's income and expenditure with supporting evidence, similar to the fact finding exercise when setting up the IVA.

Again the purpose of this is to check whether monthly payment amounts need to be varied. It need not be a painful process and many individuals find it useful to check in with the IP on a yearly basis.

What happens if my circumstances change?

It is inevitable for some people that their circumstances will change over the five year period of the IVA. It is normally preferable that the IVA plays out as originally planned, but sometimes exceptions do occur. For example:

  • Income difficulties from accident or redundancy
  • Change in household circumstances such as separation or new children

If circumstances change significantly the individual should contact the IP to discuss the changes. If, under exceptional circumstances, it is necessary to make a variation to the IVA then the IP has the ability to hold a variation meeting with the creditors.

There is no guarantee that the IP will elect to hold a variation meeting, and there is no guarantee that the creditors will accept the varied terms of the IVA.

Is it possible to pay off an IVA early?

There are sometimes situations when the debtor will come into some money for some reason and seek to settle the IVA early. This early settlement mechanism is known as 'Full and Final Settlement'. Examples of situations where this could occur include:

  • Funds or property inherited
  • Change in marital situation

In such circumstances it is possible to seek to settle the IVA early, however only if the new funds contributed will pay off the entirety of the original debt or a significant amount more than the original proposal. If there would still be a significant amount owed to the creditors, they will look to take some contribution from the lump sum and also continue to take monthly payments.

Should there be an opportunity to arrange full and final settlement the debtor should contact their IP to take advice and make any necessary arrangements.

Dealing with windfalls, bonuses and pay rises

For some people their financial circumstances may significantly improve during the five year period of an IVA. Most IVAs will include standard terms to deal with windfalls, bonuses and pay rises.

As a guideline the creditors will typically require that 50% of these that occur during the period must be contributed towards the IVA. The exception to this is if the amount is sufficient to propose a full and final settlement, and hence terminate the IVA early.

Making payments to creditors

At the end of each year from the set up of the IVA, the IP will assess what funds are available in the bank account. If there are sufficient funds, the IP will then make a payout to the creditors (a 'dividend').

The available monies are divided out based on how much each creditor was owed originally. For example if 25% of debts were with a specific credit card, then that lender will get 25% of every dividend.

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