An IVA ( an individual voluntary arrangement) is a proposal made by a debtor – through an insolvency practitioner – to their creditors to make a reduced payment to their unsecured debts. It is a legally binding arrangement and is a form of insolvency that stops short of full bankruptcy and allows business people to continue to trade and indebted individuals to pay back a proportion of their debts.
A very simple generic explanation:
It is basically an offer to the creditors for payments over a period of years – traditionally five but could be fewer or even one year longer to compensate for any equity the debtor may have in their property. It can also be one lump sum offered in full and final payment to the creditors. Basically it is anything the debtor puts forward that the creditors will accept. There can even be 100% IVAs where someone pays back the whole of their debt plus fees in order to avoid bankruptcy . There are a large number of examples which can be found on the Payplan home page in the green shaded box on IVAs – click on “View all examples”.
To apply for an IVA a debtor must be insolvent – that means that their debts outweigh their assets or they are unable to pay their debts as they fall due ie not able to make the full, monthly contractual payment for loans or credit cards etc or pay bills due.
An IVA is not fee free but many of the large companies do not charge any upfront fees. There are fees for putting forward the proposal and then if it is successful for supervising it. The companies that charge no upfront fees take their nominees fees from the first few payments into the IVA and the supervisor fees as a proportion of the payments into the IVA. This means that creditors do not get all the money paid into an IVA but a proportion and so receive a dividend. The dividend the creditors will get is more than they would get if a debtor were to go bankrupt and the dividend will be specified in the proposals. There are also other charges such as disbursements and insurance.
The insolvency practitioner (IP) – every firm that does IVAs must have at least one – acts as the nominee whilst the proposal is being set up and as the supervisor once it has been approved. As the nominee s/he has a responsibility to the debtor to put forward the best proposals possible for them and an obligation in law that these proposals be realistic and sustainable. Once the IVA has been approved the supervisor’s obligations remain the same for the debtor and in law but now they also have an obligation to the creditors that they will collect the money offered in the proposals. If the IVA is satisfied then the remainder of the debts are written off when the period ends. Whilst the IVA is proceeding the debtor is protected from creditor contact and further interest and charges.
The proposals are always sent to the debtor for checking and signing and various proofs are asked for whilst the proposals are being prepared. The IP company will write to all the creditors asking them to prove the debts and the budget is checked for accuracy.
For an IVA to be approved 75% by value of all creditors voting have to vote in favour. Imagine that £16,000 was owed to 6 creditors and four creditors voted on the day of the creditors meeting– as although all creditors are contacted not all will vote and the majority of creditors today vote through groups who vote on their behalf. Creditor A is owed £4000 and votes in favour and creditors B,C,D are owed £200 each and vote against. On the day 75% of the creditors have voted against the proposal but creditor A (with 75% and more of the debt on the day) has voted for the proposals – so the IVA is approved. If it were the other way round, the meeting would be adjourned and the other creditors would be canvassed as if they all voted in favour then 75% would be voting for the IVA. Creditors have various voting patterns and criteria and all IP companies are aware of these so cases are not put forward willy nilly.
If the IVA is continuing over several years there will be annual reviews of the income and expenditure and if there are significant increases in income over expenditure then it would be expected that the instalments would increase. Also any bonuses would have to be declared and any overtime would be counted up – if the overtime was more than 10% of the normal salary then 50% of any increase above 10% would be expected to be paid in.
A lump sum IVA basically is one payment made in one day – including fees of course – in full and final settlement of debts. Proposals are still made and put forward but as there is payment on approval there is no lengthy supervision.
Equity in a property is always taken into consideration and if the debtor’s share of equity is substantial then this will be included in the proposals. For most IVAs there will be a clause in the proposals that will ask for a debtor to release as much equity as possible in month 54 of their instalment IVA. However if they are unable to remortgage for whatever reason or the cost would be prohibitive and various other factors then the IVA can be extended for up to another 12 months to compensate for the equity.
IVAs sit on a person’s credit rating for 6 years from the day they are approved so if someone could repay their debts in less than 5 years it would seem unnecessary to do one and creditors do check proposals carefully so it is unlikely that one would be put forward in anything other than exceptional circumstances.
More information on what an IVA is as a debt solution and the advantages and disadvantages of this can be found from the landing page at www.payplan.com and also there is a useful factsheet on IVAs on www.nationaldebtline.org
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