An IVA or Individual Voluntary Arrangement is a formal agreement between someone who owes money (debtor) and the people he or she owes money to (creditors) and offers an alternative to bankruptcy.
There will have to be a minimum level of debt (usually around £7000, although this can vary) and a minimum level of disposable income before we can consider you for an IVA. We will discuss this in more detail with you once we have conducted a full assessment of your situation.
How is an IVA set up?
An IVA has to be set up by an insolvency practitioner (IP), who is usually an accountant or solicitor who is authorized to set up IVAs. Once an IP has agreed to make an IVA proposal for you they can apply to the county court for an interim order, which stops your creditors starting bankruptcy proceedings against you.
The IP then sends the IVA proposal to your creditors and arranges a formal ‘creditors’ meeting’ at which creditors will vote on whether to accept the IVA.
If 75% (by value) of your creditors agree to the proposal your IP will supervise the arrangements and ensure that you make the agreed payments.
Please note that it will take time for an IVA to be established and there is no guarantee that your creditors will accept the proposal. Since you still need to make payments to your creditors, we will set up a Debt Management Plan (with no monthly fees) until the IVA proposal is accepted. Fees on the Debt Management Plan would only commence if the IVA proposal is rejected and you decide to continue with this option.
The advantages of an IVA
- At the end of an IVA, usually five years, you will be debt free. N.B. only unsecured debts within an IVA may be written off at the end of the period. Any debts not included in the IVA will remain outstanding.
- Creditors cannot contact you direct.
- If there is a valid reason, payment breaks of up to 6 months can be arranged. This period can be extended but only at the discretion of the Insolvency Practitioner. Please note that payment breaks will result in the term of the IVA being extended accordingly.
- Anyone who is a sole trader or partner can continue to trade, and therefore generate income which will go towards repaying creditors. They would not have a call on your personal assets.
- An IVA does not impose the restrictions imposed by bankruptcy, for example you can continue to use your bank account.
- If you’re in a profession – the financial sector, police, armed forces, for example – where going bankrupt could lose you your job, an IVA could be preferable, though it may not always protect your job.
- You will not automatically lose your house, though you may have to use the equity in your home to pay creditors.
The disadvantages of an IVA
- An IVA is in place for five years. Bankruptcy is only one.
- Your credit rating will be affected for 6 years despite the fact that an IVA will last for 5 years.
- Not all debts can be included in an IVA. Only unsecured debts (including those with County Court Judgements attached, Inland Revenue Debts and Council Tax and utility bill arrears) can be subject to the IVA. Other debts not subject to the IVA (including Mortgages/secured loans, Hire Purchase payments, current utility and council tax payments, Child Maintenance payments, Student loans and fines) will obviously remain outstanding at the end of the IVA term. Priority monthly costs such as mortgage/rental payments, council tax, utility bills and child care costs are taken into account before determining a realistic monthly repayment to your creditors so that these essentials remain affordable. Payments for these must be maintained by you. Non-payment may result in repossession of, or eviction from, your home or loss of essential goods and services.
- 75% (by value) of your creditors must agree to the IVA so there is no guarantee of approval.
- If you cannot maintain payments, the IVA can fail and you may be made bankrupt.
- The insolvency practitioner administering the IVA may insist on equity in your home being released to pay off some or all of the debt. The ability to obtain a mortgage may be restricted and is likely to be on less favourable terms (i.e. may attract higher interest rates). You need to be sure that you can afford these higher repayments if your home is remortgaged.
If you are unable to obtain a remortgage, the IVA can be extended for up to 12 months.
- Details of the IVA will be held on a public register maintained by the Insolvency Service.
- There are restrictions on the expenditure of a person who enters into an IVA.
How much will it cost?
The Insolvency Practitioner will charge fees for its role as the nominee and as the supervisor. A separate fee is payable for the Insolvency Practitioner’s work in each of these roles. The Insolvency Practitioner will also charge you for various additional expenses.
Money Village will be paid a referral fee by the Insolvency Practitioner, if we handle the application on your behalf.
The nominee fee is likely to be about £1500. This covers the Insolvency Practitioner’s work in setting up arrangement such as creating the actual proposal to your creditors, establishing a meeting with the creditor to discuss the proposal and considering any changes the creditors may request.
The Insolvency Practitioner will be paid the nominee fee out of the first payments you make into the IVA and these will not be paid to your creditors. This means your accounts will go into arrears (or further into arrears).
The supervisor’s fee covers the on-going monitoring and supervision of the IVA. These fees will be taken from your monthly contribution to the IVA and will be disclosed in full by the Insolvency Practitioner before you agree to proceed. The total fee will typically be around £3000 to £3500.
The calculation of the supervisor’s costs and fees will depend on the proposal and is therefore subject to your individual circumstances so the above is only an estimate of the likely costs.
A significant amount of your payments are taken to meet your Insolvency Practitioner’s fees, so if your IVA fails you will remain liable for the balance of your debt and the balance of any fees already incurred. It is therefore essential that you maintain the agreed level of monthly payment.
A client has 6 unsecured debts totalling £30,000, with contractual repayments of £500 per month.
An Insolvency Practitioner (IP) assesses that the client can only afford to pay £250 towards the debts.
An IVA is agreed by all the creditors- £250 per month (which includes the fees and costs mentioned above) is paid for 5 years.
At the end of the term, the total paid would be £15,000 and the remaining £15,000 would be written off by the creditors.
This assumes that repayments have been maintained for the full 5 year term and that there is no equity in a property or other assets/windfalls become available.
If equity is available, then the client may be asked to remortgage up to a maximum of 85% of the property value, which increases the amount repaid.
If the client has a property, but is unable to remortgage, then the term may be extended by 1 year.
This increases the term to 6 years and the total repayable, in this example, would be £18,000.
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