Many people surf the web to try and find out about IVAs before taking the plunge of going to see an insolvency professional. This is quite a sensible approach in so far as the understanding and knowledge gained will help the individual prepare for a deeper scrutiny of their personal finances, particularly if they are in financial trouble.
One of the most common queries that people have is how much they will be allowed to live on if they are insolvent and have to enter into an IVA or indeed go bankrupt. They want to know how their family will fare and particularly their dependants. They want to know what level of normality will obtain and how much they will suffer or have to do without.
The answers to these sorts of questions are not set down in any one place and it is not easy to determine what expenses will be accepted by creditors and what will not. Because every case is different creditors must look at each IVA proposal before deciding how they vote. They will often propose changes to the debtor’s proposal. These changes are called modifications. By and large the debtor has little choice but to go along with such modifications although the IP whom the debtor has nominated to act may enter into a dialogue with creditors and seek to get them to change their minds or soften the financial burden on the debtor a little.
There is however a blueprint which most creditors say they adhere to in deciding allowable living expenses in IVA proposals. These are the CCCS Budget guidelines for family expenditures. They are updated every year. These guidelines set out the maximum and minimum amounts which a debtor proposing an IVA may claim in his or her statement of income and expenditure.
Before we look at the detailed expenses allowed by creditors in an IVA it is worthwhile to remind ourselves in simple terms what an IVA is and look briefly how it works. An Individual Voluntary Arrangement or IVA is a formal insolvency process and is an alternative to bankruptcy. In an IVA you enter an agreement with your creditors that you will repay a certain amount of your debt over a fixed period of time, usually five years, although the term could be much shorter. It could be as little as six months if you can offer a cash lump sum to your creditors. The important point is that at least 75% of your creditors as measured by the amount of your debts to them must accept your IVA proposal. This decision is taken at a meeting of your creditors and it is binding on all of your creditors, even those who abstained and elected not to vote either for or against your proposal.
It should be stated that for an IVA to be proposed, you the debtor must be insolvent and the total of your unsecured debts would have to be at least £15,000. You need to have a regular source of income and have a reasonable amount of disposable income left over after taking into account your normal living expenses and the amount you need to keep back to service your secured debts such as your mortgage and car HP. This disposable income is the payment you make each month to your IVA and which is used to pay your unsecured creditors and to fund the administration costs of your IVA.
By law, you must utilize the services of an Insolvency Practitioner or IP to assist in the IVA process. The IP’s charges are clearly stated in the proposal and these fees and costs are deducted from the monies you contribute to your IVA. There are no upfront fees to be paid and if your creditors do not accept your IVA proposal, you pay nothing to the IP.
If your IVA is accepted, all of your creditors must cease recovery actions against you and must, by law, suspend all interest and charges. The IP assumes all contact with your creditors on your behalf and makes the payments to your creditors out of the monies you pay into your IVA. So in our next article ‘IVA Guidelines’ we will look at the expenditure element of the IVA proposal and specifically what creditors will or will not allow you to claim as a living expense in accordance with the CCCS budget guidelines.
Written by Paddy Byrne
21 / 09 / 2012