IVA - THE ADVANTAGES AND DISADVANTAGES

According to statistics produced by the Insolvency Service, they recorded 26,072 personal insolvencies in the 3rd quarter of 2007, of which 10,239 were IVAs. Out of 82,279 personal insolvencies recorded so far this year, 33,535 of these have been IVAs, representing 40% of the total.

It is clear from the figures above that many individuals feel that the Individual Voluntary Arrangement, or IVA, is their light at the end of the tunnel. Indeed, the IVA is both a flexible and effective method of dealing with debt which offers debtors the protection they need from further legal action in respect of their debts, flexibility with regard to what assets are used to satisfy their debts, and none of the restrictions associated with bankruptcy. Creditors also benefit from a higher return than can usually be expected in the case of bankruptcy.

However, if an IVA is your light at the end of the tunnel, you should not forget that it is a legally binding contract between you, your creditors and the Supervisor of the arrangement. Once agreed at a meeting of creditors, you must adhere to the terms of your proposal as failure to do so could lead to bankruptcy.

With the above in mind, what are the advantages and disadvantages of entering into an IVA?

IVA Advantages

a Debt Free - An IVA lasts for a fixed period of time, normally no longer than 5 years, at the and of which you could be debt free.

a Payment Demands Stopped - Once the IVA is agreed, your creditors are bound by the agreement and by law they are unable to demand payments from you either by telephone or letter.

a Interest and Charges Frozen - Upon approval of the IVA, creditors cannot add any further charges or interest to your accounts covered by the agreement by law.

a Single Monthly Payment - At the beginning of the arrangement, you agree an affordable monthly payment with your creditors. In some cases, proposals may even be based on payment of a one-off lump sum.

a Repaired Credit Rating - Once you have successfully completed your arrangement, you are issued with a Certificate of Completion. This will have a beneficial effect on your credit rating.

a Fixed, Legally Binding Agreement - The IVA is legally binding on you and all your creditors. You will know exactly where you stand and how long it will take before you are debt free.

a Protection from legal action - Once approved, creditors bound by an IVA are not allowed to take any further legal action against you as long as you meet the terms of the arrangement.

a A Private Agreement - An IVA is a private matter between yourself and your creditors so, unlike bankruptcy, there will not be public notice in the local papers.

a Professional Status Unaffected - You can continue in your current profession (e.g. doctor, solicitor or accountant with the consent of your professional body) whilst undertaking an IVA without any adverse impact to your job.

aAbility to hold public office unaffected - An Individual Voluntary Arrangement does not affect your ability to hold public office.

a Lower fees - IVA fees tend to be less in comparison to the court costs and Official Receiver fees involved in a bankruptcy.

a A Flexible solution - if your circumstances change during the course of the arrangement, its terms can be modified to take these into account, with the approval of your creditors.

IVA Features

r Possible Release of Equity in your Home - If there is any equity in your property or any other significantly valuable asset, you may be required to release some of this as part of the IVA agreement, although you are usually allowed to keep approximately 15% of your share.

r Minimum Level of Debt - An IVA is usually only suitable for people with a minimum level of unsecured debt around £15,000 or more. Additionally, you will usually need to be able to afford a monthly payment of at least £200.

r No Unsecured Borrowing while the Arrangement is in place - You will not be able to obtain and use store or credit cards. Any cards you have at the time the IVA is approved must be cut up and returned to the financial institution which issued them. However, it may be possible to change an existing mortgage or apply for a new one while you are in an IVA. Your IP can advise you on this.

r Monthly Payments must be affordable - IVAs are only suitable if you can afford the monthly income contributions to your creditors.

r Creditors must agree - Your creditors have to agree on the arrangement through a vote, and 75% by value of those voting have to agree.

r You must maintain your monthly payments - If you do not make your regular payments to the IVA it is likely that the arrangement will fail and your creditors will be at liberty to take all the usual debt recovery actions against you. Often the supervisor is required by the creditors to petition for the bankruptcy of the debtor on the failure of an IVA.

If you want to know more, why not contact The Debt Helpline free on 0800 88 18 274.

Starting an IVA

Who Can Use An Individual Voluntary Arrangement (IVA)?

The use of an IVA as a way to solve your debt problems is available to anyone. Your ability to undertake an IVA is based on your financial circumstances and not your job or profession.

An IVA can help anyone who is experiencing difficulty managing their level of debt, and is particularly beneficial for those people who own property which may be at risk if they were to be made bankrupt.

An IVA might benefit you if:

• Your creditors will not agree to an informal debt management arrangement
• You have already tried other, more informal methods of tackling your debt, but these have failed
• You owe money to too many creditors making the option of an informal debt management arrangement impractical
• You are facing the threat of bankruptcy, or you have already been made bankrupt and want to reverse the situation

Other benefits of an IVA:

• If you are running a small business it would be difficult to continue to trade if you were made bankrupt as you would find it difficult to obtain supplies and may be committing a civil offence if you sought to obtain credit whilst an undischarged bankrupt.
• In certain professions, such as accountancy/police/armed forces, if you were to be made bankrupt, you could lose your job.
• You may be able to raise a one off large lump sum, and want a formal arrangement with your creditors to accept the lump sum and write off the remaining debt.
• Your surplus income each month may be sufficient to allow you to meet your monthly domestic expenditure and make monthly payments to your IVA.
• You will not automatically lose your house or other assets as they can be kept out of the IVA. However, creditors will usually require a lump sum contribution from the equity in your house. See the section on Disadvantages of an IVA.

How an IVA works

All your outstanding debts are rounded up into the arrangement and settled within a reasonable and fixed period of time, usually 5 years. It is likely that any interest and administration charges will be frozen as at the date of approval of your arrangement.

Once you have decided that an Individual Voluntary Arrangement is right for you, an Insolvency Practitioner, or IP, will assist you in preparing your proposal by asking you a number of questions regarding your current financial situation. This information forms the basis of your proposal and enables the IP to calculate a potential monthly payment. Although the IP helps you draw up your proposal and may suggest what sum of money you should pay into your IVA each month, it is still your proposal. Once drawn up, you need to check you are happy with the proposed agreement. If you are, sign the proposal and return it to your Insolvency Practitioner (IP).

If any of your creditors have already begun to take action against you, such as instituting proceedings to seize your household goods or trading assets or petitioning for your bankruptcy, it may be necessary to make an application to court for an Interim Order to stay this action. Your IP will sort this out for you. Once an Interim Order has been granted, none of your creditors will be able to take any further legal action against you prior to the consideration of your proposal by a meeting of creditors.

For an IVA to be approved, your creditors will be invited to attend a meeting and vote either in person or by post for or against the arrangement. You may be asked to attend the meeting, but often this is not required. Instead, you should make sure that you are contactable during the day of the meeting. It is unusual for creditors to attend in person and most prefer to vote by fax or post. If only one creditor attends and votes "for" the Individual Voluntary Arrangement it will be approved. If more than one creditor attends the meeting, there is a requirement that creditors with claims representing 75% of the total value of their claims voting must be in favour for your proposal to be approved. If a creditor who votes against the IVA has a claim representing more than 25% of the total debt you owe, then the IVA will not be approved.

If any of the creditors don't vote, it is assumed that they are FOR the Individual Voluntary Arrangement and their claims will be bound by the arrangement.

Creditors may vote in favour of your IVA but stipulate their own modifications to the terms as a condition for their acceptance. You will be entitled to review the modifications and accept or reject them, but beware. The creditor may have already stipulated that rejection of their additional terms would result in their vote being cast against approval of the IVA. If you have any doubts, you should discuss this with your IP.

Once your IVA is accepted, the Insolvency Practitioner's role changes to that of supervisor. He or she monitors the IVA's progress to ensure that the terms and conditions agreed at the creditors' meeting are properly adhered to.

During your Individual Voluntary Arrangement, your supervisor will also review your financial situation on a regular basis to see if there has been any change in your circumstances.

It is important not to confuse an Individual Voluntary Arrangement with a Debt Management Plan (“DMP” ). Although you make monthly contributions into a “pot” which is then split between your creditors, a DMP it is not a legally binding contract and your creditors are at liberty to take action against you to recover their debt.

Most IVAs are based on affordable, monthly, income payments over a period of 60 months. Your income payments are based on the surplus income available to you once you have deducted essential expenses, such as rent, groceries, council tax, from your monthly income.

It is up to the individual to ensure that they make the agreed income contributions to the IP who will then distribute the funds to all creditors on a pro-rata basis in accordance with the terms of the IVA until its successful completion. Failure to maintain the monthly income contributions is likely to result in the failure of the IVA and may lead to bankruptcy.

An IVA is a legally binding contract between you and your creditors. As long as you meet your obligations under the terms of your proposal, when you have complied with all the terms and your IVA is concluded, you will be free from these debts regardless of how much has been paid back to your creditors. Any outstanding balances are written off and you will be free to make a fresh financial start.

It is worth noting that not all IVAs are purely contributions based. If you have other assets of value, they may be included in the terms of your IVA. For example, if you have an endowment policy linked to your mortgage, you may be expected to cash it in and pay the proceeds into the arrangement. Alternatively, if your property has a reasonable amount of equity, you may be required to remortgage your property, perhaps towards the end of the arrangement, so that you can release some of this equity for the benefit of your creditors. Additional funds from such sources may be a deciding factor in whether your IVA is approved by creditors or not.

What is An IVA?

Individual Voluntary Arrangements, or IVAs were first introduced by the government under the Insolvency Act 1986 as an alternative to bankruptcy.
An Individual Voluntary Arrangement (IVA) is a formal insolvency procedure. It is an agreement made between you and your creditors whereby you and your creditors come to an arrangement that you will make affordable monthly payments from your income and/or utilise your other assets in order to pay off a percentage of the total amount of your debt. As a general rule an IVA lasts 5 years and, provided you meet your obligations under the agreement, at the end of the 5 years your debt is classed as settled.
The IVA is an extremely powerful tool enabling you to put forward a deal to your creditors by way of a proposal which, if approved by the required majority of your creditors, becomes legally binding. However, due to the formal nature of this process, you will need the assistance of a licensed professional, an Insolvency Practitioner, to help you set up your IVA. At the Debt Helpline, we do not charge you any upfront fees for providing this assistance with your proposal for an Individual Voluntary Arrangement.
While an IVA is much simpler and more flexible than bankruptcy proceedings, you should not look at it as an easy option. While it offers you some great advantages (namely protection from further creditor action and more manageable monthly payments), you are signing up to a legally binding contract for the privilege. In some cases, bankruptcy may be a more suitable option.