Why creditors might reject your IVA

Incorrect financial information

Creditors take it for granted that you are truthful in your IVA Proposal about your current financial circumstances and how they arose. They expect you to be open, frank and honest and to disclose all relevant facts about your income, expenses, assets and liabilities. If a creditor is aware that you are hiding some important fact about your insolvency they then they will be dubious about the IVA proposal as a whole and be likely to reject it. They may bring any doubts and queries about your Proposal to the attention of the Insolvency Practitioner who is chairing the meeting of creditors so as to allow you to clarify what may have been an innocent oversight but they are not bound to do so and may simply Reject the IVA without giving a reason.

An unrealistic IVA offer for your creditors

The IVA proposal should be the your best attempt at addressing your unsecured debts and the payments being offered to creditors must be credible and reasonable. Your income and expenditure statement should reflect the reality of your circumstances. No source of income should be omitted or understated. If you work regular amounts of overtime, thus boosting take home pay and disposable income then your IVA proposal should disclose this information. Reasonable family living expenses should be claimed but they should not be padded out unrealistically to try and maximise income. If you are co-habiting, the household expenses should be split in a reasonable way between you and your partner, usually calculated pro-rata to the respective incomes of the partners. Creditors will expect the joint incomes and expenses to be disclosed, even if your partner is not in trouble financially.

HMRC compliance

If your are self employed, then offering proposals for an IVA is a waste of time if there is a significant history of non-compliance in terms of making returns to HMRC. If you have a history of non-compliance, then HMRC are likely to reject the proposal. If self employed returns are up to date, HMRC may well accept the IVA proposal even when the liabilities to HMRC are substantial. If you have acted fraudulently in the past in your dealings with HMRC, again the chances of HMRC accepting any IVA proposal are slim.

All unsecured creditors must be treated equally

Rejected IVA
A creditor might reject an IVA if they feel they are not treated fairly n the proposal.

You, as the debtor, should take particular care to include all unsecured creditors in the IVA proposal and to treat all creditors equally. HMRC in particular dislike any proposal where one creditor, sometimes called a hostage creditor, seeks to be treated more favorably than other creditors. For example, as a self employed person, you might have such a creditor supplying certain goods or services critical to your business. That creditor might only be willing to continue to do business with you if they are excluded from your IVA and if they receive payment in full for all debts incurred by you prior to the IVA being approved. This is an unenviable situation to be in and would amount to preferential treatment in the IVA for that creditor, who is essentially holding you hostage. From your point of view, if you include the hostage creditor’s debt in the IVA, that creditor will stop supplying critical goods or services and your business may fail as a result which in turn may cause the IVA to fail. If on the other hand you fail to disclose the liability to the hostage creditor and exclude it from the IVA, fully intending to service that debt secretly, than again the IVA may fail if and when the supervisor of the IVA or a creditor discovers the preferential treatment. In such circumstances your business is also likely to fail.

Not the best option for creditors

If a debt management plan or DMP could result in all creditors being repaid in full in a reasonable period of time, then creditors might also reject proposals for an IVA. The question arises as to what constitutes a reasonable period of time. Given that many IVAs are for a term of five or six years, then a reasonable period of time for a DMP could be anything from six years to ten years. Such an outcome might well depend on some or all interest and penalties being frozen during the life of the DMP and that is by no means guaranteed.

A further factor is that some creditors prefer the legal framework in which IVAs are supervised as distinct from the largely unregulated, informal and voluntary nature of DMPs.

Recent debts

The relationship between the creditor and the debtor is also a significant factor in determining the creditor’s attitude. If you are a relatively new customer and the debt was incurred within the last six months, it would not be surprising for the creditor to reject the IVA. On the other hand if you are a customer of long standing, say ten years or more, and the new debt was simply a consolidation of several existing debts with that creditor, then the creditor is more likely to accept the IVA, given their long term knowledge of your financial history.

Your past behaviour may be unacceptable

The creditor may decide that the IVA would be likely to fail in supervision based on their knowledge of your lifestyle. A creditor may look at how the debts were accrued in the first place. If you engaged in a lavish but unsustainable life style over a period of time apparently not caring whether such lifestyle debts could be repaid or worse, borrowing recklessly knowing that the debts could not be repaid in any reasonable time frame, then a creditor aware of this fact would be inclined to reject such a proposal. If your lifestyle involved chronic addictive behaviour such as excessive gambling, drinking or drug-taking and if the insolvency was likely to be due to such behaviour, creditors would have to be satisfied that such behaviour had ceased and that you had taken reliable corrective action to sustain the changed and improved behaviour, before accepting such an IVA.

The offer may not be viable for the creditor

If the estimated amount to be paid in the IVA is very low, it may not be financially viable for the creditor to accept the IVA. Suppose for example that the debt is £500 and the projected dividend in a five years IVA is 20p in the £. The creditor can expect only £100 of the debt to be repaid over five years. The administrative costs of providing a proof of debt and keeping the account open might not be worthwhile financially and such a creditor might reject the IVA.

The creditor may be in the process of securing the debt

A creditor may already have taken steps to secure the debt by obtaining a charging order against your property. Suppose that a creditor has already obtained an interim charging order when your IVA proposal arrives. The creditor has two choices. The first choice is to proceed to obtain a final charging order and rely on that for the satisfaction of the debt hoping that the IVA will be rejected so that the charging order can be made absolute. If relying on the charging order the creditor would not be permitted to vote for or against the IVA and if the IVA was approved the charging order would not be granted and the creditor could claim as an unsecured creditor in the IVA, receiving the same dividend as the other unsecured creditors. The second choice available is for the creditor to give up their security and submit an unsecured debt claim in the IVA and thus be permitted to vote for or against the proposal. If the IVA proposal was rejected, the creditor could re-apply for a charging order after the meeting of creditors.