If you have debts you cannot afford to repay you might still like to reach a binding agreement with your creditors based on what you can afford. Provided you have a regular income, an IVA may help you to reach such an agreement and to repay some of your debts in a reasonable, finite and fixed period of time. At the end of that time, an IVA allows you to write off the remainder of your debts, provided you have adhered to the terms of the IVA, as agreed by you with your creditors at the outset. These remaining debts are considered to have been discharged.
If you have assets such as a house or a car your agreement with your creditors will deal with how these assets are to be treated in your IVA. You will not necessarily lose your assets, although you may have to make some contribution to your IVA in respect of your interest in them, such as the equity in your house. Most people entering an IVA can retain control and ownership of their assets, particularly their home.
An IVA is a formal and binding agreement to repay a portion of your debt over a limited period of time, usually five years, but it can be for a much shorter period or for a somewhat longer period in a small percentage of cases. The agreement is binding on all parties, namely you and your creditors.
With the exception of your secured debts such as your mortgage or your car HP, all unsecured debts must be included in your proposal for an IVA.
Unsecured debts are for example credit card and store card debts, loans, current accounts, borrowings from friends or family, arrears on utility bills such as water, telephone, gas or electricity, self assessment tax arrears and arrears on council tax.
It is not necessary for all of your creditors to agree for your IVA proposal to be accepted. All of your unsecured creditors have the right to vote on your proposal. In practice, not all creditors exercise this right. Of those who do vote, at least 75% of them, as measured by the value of your debts to them, must accept your proposal for an IVA to come into being. One way to think of it is that each pound of debt is equal to one vote so the voting power of creditors is directly proportional to the relative size of the debts.
Unsecured creditors who do not vote are still bound by the decision taken by the creditors who did vote and the IVA is equally binding on them. All accepted IVAs are registered with the government. The main legislation governing the formation and conduct of IVAs is governed by the Insolvency Act (1986) together with some more recent legislation.
Once your IVA commences, you will usually have to make payments each month according to what you can afford. An income and expenditure statement is prepared and your monthly payment will usually be the difference between your income (made up of what you earn in your employment together with any other income you receive such as pensions, dividends and benefits) and your expenditure (made up of your day to day living expenses, including mortgage and car HP payments and the living expenses of any dependents you may have such as your family). This difference is usually called your disposable income or your DI.
These monthly payments have to be made for the duration of your IVA which is usually five years or sixty months. However, it can be shorter than that if additional funds should become available. For example, if you should re-mortgage your house, with the prior agreement of your unsecured creditors, thereby releasing an equity lump sum, and contribute some or all of this lump sum to your IVA, creditors could agree to reduce the duration of the IVA, enabling you to be debt-free in a shorter period of time.
In regard to your secured debts such as your mortgage or car HP, you continue to pay these directly to your secured creditors and they are allowable expense items on your income and expenditure statement.
The administration costs of your IVA are deducted from your monthly payments before the balance is distributed to your creditors. Those costs will have been agreed upfront with your creditors at the time the IVA is accepted. You have to pay nothing more yourself.
To get an estimate of these administration costs, talk to your IVA provider who is assisting you in compiling your IVA proposal. A summary of the costs of the IVA or the basis on which costs are charged have to be included in the proposal itself and these will usually be fixed over the duration of the IVA. So, you will know up front what the costs of the process will be over the full duration.
It is important to get advice on an IVA and the likely costs. Many firms offer insolvency services on a commercial basis, and free initial advice is often included as part of those services. There are also some charitable firms which are funded by creditors and which offer free advice. If you decide to propose an IVA to your creditors, you are obliged by law to use the services of a qualified and licensed Insolvency Practitioner (IP) in compiling the IVA proposal and calling the meeting of creditors which will decide to accept it or reject it. The IP who acts for you up to and including the stage of the meeting of creditors has the title of Nominee. Once your IVA is approved by your creditors, it is supervised and administered by your IP also, who now has the title of Supervisor. Your IP, whether in the role of Nominee or Supervisor, charges no fees and receives no income whatsoever until the IVA has been accepted by your creditors. The IP’s fees then come out of the monthly payments you have agreed to make into your IVA. If your creditors do not accept your IVA proposal, your IP receives no fees whatsoever and you, the debtor, have nothing to pay.
You need to be aware of the full range of financial solutions that may be available to you and to consider their merits. The main alternative options usually consist of obtaining a consolidation loan, entering a debt management plan or going bankrupt. In some cases it may be possible to obtain financial assistance from a family member. It may even be possible to manage your financial problems a little differently and find that you are not insolvent after all. In such a scenario you may be able to manage your own financial affairs yourself.
To get advice on all of your options you should contact several reputable firms who offer personal insolvency services (just to make sure you are getting the best advice and that that advice is consistent). Alternatively you could contact one of the charitable free advice agencies or a local CAB office. You should not have to pay anything to get advice on your options. You will need to provide full details of your financial circumstances and following your consultation you should have a much clearer idea of what to do next. You may need several meetings to get to that point. When you are satisfied that you know and understand your options, you are still free to walk away, with the benefit of the advice. You do not have to commit to anything.
Written by Paddy Byrne