An IVA is a formal agreement between you and your unsecured creditors to repay a portion of your debt over a limited period of time – usually five years, but it can be for a shorter period.
Secured creditors expect to receive the full contractual repayments on their secured loans to you over the life of the IVA and thereafter. If you have a mortgage, you will be expected to make the monthly mortgage payments to your mortgage provider in full.
Meanwhile the unsecured creditors receive only a dividend on their unsecured loans to you. The size of the dividend can vary. It really depends on what you can afford to pay and what your unsecured creditors are prepared to accept from you. Remember that over 75% of your unsecured creditors (measured in £) must agree to accept your IVA proposals before your IVA can be approved. In practice the dividend will usually fall within the range of 20p in the £ to 40p in the £, although of course it can be much lower and indeed much higher. On occasion unsecured creditors can receive 100p in the £ and even statutory interest on top of that.
So when you offer your proposals for an IVA, your unsecured creditors are not bound to accept your offer. If they think you can make greater contributions than you offer initially, then they can propose modifications to your IVA which can have the effect of increasing the amount of your monthly contributions or indeed they can seek to extend the term of the IVA for perhaps six months or more.
An IVA can affect your mortgage equity
If you have a mortgaged property, unsecured creditors will not ignore this fact. They will consider the current market value of the property and the amount you currently owe to your mortgage provider. You will be expected to provide a current, true and fair market valuation of the property. You will also be expected to obtain from your mortgage provider a current mortgage redemption statement, showing the total cost of clearing your mortgage, including any early redemption penalty which might apply.
With these two pieces of information, your creditors can quickly assess if there is any realisable equity in the property. If there is realisable equity therein, your unsecured creditors may, by modification to your proposals, require you to re-mortgage your property during the life of the IVA and introduce some or even all of any released equity into your IVA for their benefit.
A well constructed IVA proposal will already include a provision for re-mortgaging the property and offering equity to creditors. However, it may well be that re-mortgaging is not an option for you simply because no mortgage provider will take you on due to your poor credit history. Alternatively, you may find that to re-mortgage the property, you may have to pay premium mortgage rates for the same reason.
Even if there is no equity in the property, unsecured creditors will consider the size of the monthly mortgage repayments. If they are excessive, creditors may propose a modification that you sell the property and move to rental accommodation, thus enabling you to increase your monthly contributions to your IVA. As a yardstick, mortgage payments that exceed 40% of net family income would usually be deemed to be excessive. Obviously if the cost of rental accommodation is substantially lower than your monthly mortgage payments, then it is not surprising that unsecured creditors would propose such a modification.
In recent years, property values have dipped sharply, and many people find that their property is in negative equity. This simply means that the cost of redemption of their mortgage is greater (sometimes substantially greater) than the current market value of the property. If forced to sell, the shortfall due to the mortgage provider now becomes a further unsecured liability and so would rank for dividend with the other unsecured creditors, thus depressing the dividend in an IVA.
Don’t forget that your partner or spouse may have an equitable interest in your property. In many cases that interest is 50% of the equity. Your family may also have rights of residence in the property which could make a forced sale difficult for creditors, at the very least. In conclusion then, an IVA can indeed affect your mortgage but the good news is that in most cases, debtors will not ‘lose’ their house in an IVA.
How your mortgage might be affected in an IVA
If you are considering entering into an IVA and are concerned that it might affect your mortgage, you can speak to one of our advisors at McCambridge Duffy. We will provide free and confidential advice on how an IVA will affect your mortgage We have several In-house Insolvency Practitioners, otherwise known as an IP’s, who are available providing help and assistance on complicated mortgage enquiries. Do not pay anyone for advice. A reputable IP will look at all of your financial circumstances and you should incur no costs in obtaining this advice.
Your IP will go on to advise you on all of the options open to you including entering into an Individual Voluntary Arrangement (IVA). If you do not want your mortgage to be affected in an IVA, there are other options available. You might consider doing a Debt Management Plan (DMP) for example which is a more informal arrangement. There may be other options available as well. You can choose the best option for yourself in the light of the advice provided by the IP.
To find out more about an IVA or other financial solutions please Get Debt Advice