IVAs

Option # 3/ An Individual Voluntary Arrangement (IVA)

How does it work?

Margaret Thatcher's government came up with this idea in 1986. It was conceived as an alternative to the epidemic of bankruptcies that broke out during the negative equity crash of the period.

An IVA can be a workable alternative to a Debt Management Plan, especially where the option to make reduced payments under a Plan would result in a ridiculously long repayment period.

Before committing to an IVA, It is important that you are able to meet the monthly payments — i.e. have a regular and predictable income.

An IVA is particularly attractive (but not exclusive) to people who run their own businesses, because it allows them to continue trading uninterrupted, effectively giving them a second stab at getting it right.

You are also able to retain your home and other assets, although, depending on the terms of your arrangement, some creditors will only vote in favour of your IVA if you agree to release any equity in your property at the end of the repayment period, and pay it into the 'fund'.

What is an Individual Voluntary Arrangement (IVA)?

It means you make a formal proposal for payment to your creditors. This has to be done through a licensed Insolvency Practitioner (who will also be an accountant or a solicitor). The proposed payments, paid monthly over a fixed period (usually five years), are significantly less than the total owed to your creditors. In practice, about 80% of your debt will be written off, and the remaining 20% is then spread over sixty payments, which is then divided among your creditors. Once in place, your life then continues pretty much as it did before you took out the IVA. The only difference being that you will sleep better at nights, because your outgoings are (in theory, at least) once more under control and your creditors have stopped hassling you. You will, however, have great difficulty in obtaining future credit, as an IVA will be recorded on your credit file.

NB

By entering into the Arrangement, your creditors accept your revised payment offer in full and final settlement of their original claim. They cannot come chasing you for the balance at a later stage — unless, of course, you default on the IVA!

How do I know I'll get an IVA?

It's a pretty straightforward formula. Your creditors are invited to a 'Creditors Meeting' (they seldom attend in person, but are often represented by proxy) where they will have the option to vote whether to accept or reject your proposal. It does not have to be a unanimous vote, but as a rule of thumb creditors must be in agreement to the sum of 75% by value of your overall debt. So, to take a simple illustration: if you owed a total of 100k between four creditors, but you owed one of those creditors, say, 50k, and that creditor voted against your IVA, your proposal would fail. But if you owed that same creditor just 25k, and he voted against your IVA and the remaining creditors all voted in favour, it would go through regardless, and the dissenting creditor would have no choice but to accept.

Whatever some Insolvency Practitioners will tell you, it is not a foregone conclusion that your proposal for an IVA will be accepted. In fact, I have heard of cases where people have paid a significant non-refundable deposit to an Insolvency Practitioner (£500 - £1,000), or even the full amount, only for their proposal to fail. There are ways of avoiding this scenario, discussed below.

NB

If your initial proposal fails, all is not necessarily lost. It depends whether your dissenting creditor (s) has thrown it out altogether or is just holding out for an increased offer. In the latter case it is usually possible to re-jig your finances to meet their demands.

A minority of less scrupulous practitioners (or their representatives) will persuade you to take out an IVA even if it is not necessarily the best course of action for your circumstances. Do not be lulled into a false sense of security, and always seek an alternative opinion.

A further warning:

'For profit' debt management companies (as mentioned in the previous section of this report) will often act as agents for Insolvency Practitioners, in addition to their other services. It is common practice for them to frighten their clients into taking out an IVA instead of bankruptcy. Why? You've guessed it...

Why take out an IVA?

Stigma

Firstly, an IVA is not reported in the press, unlike bankruptcy (more on that later), although this in itself would be a ridiculous reason for not going bankrupt, if it happened to be your best option.

There are also fewer restrictions than with bankruptcy: you are able to continue to run your existing business, be a director of a company, and to continue to work in certain professions, all of which are proscribed for un-discharged bankrupts. Also, you do not relinquish control of your financial affairs to the Official Receiver, as with bankruptcy. So going down the IVA route depends very much on your personal circumstances.

When they have applied for an IVA on your behalf, your Insolvency Practitioner (in their role as your 'Nominee') will apply to the courts for an 'Interim Order' to prevent your creditors from pursuing you. They will also ask for the interest on your debts to be frozen.

There is usually a time lapse of a few weeks until the message finally trickles through to your creditors, so don't expect the letters and phone calls to stop overnight. But they will stop. At last, a good night's sleep. ZZZzzzzz...

What are the disadvantages of an IVA?

Your assets can become vulnerable

Your assets such as equity in a property will be taken into account. As mentioned above, the Insolvency Practitioner may wish to include significant assets such as property in your IVA, especially if they suspect that it will have a bearing on the success of the IVA. Fight hard to avoid this.

You've entered into a binding agreement. If you were to default on the arrangement then the Insolvency Practitioner can petition for your bankruptcy. Although this will depend on your financial circumstances. In practice they are unlikely to bankrupt you if you have no assets — it's far too costly. And if there's insufficient money in the 'fund', who is going to pay the court and legal fees?

Cost

An IVA will cost you as much as £3000 to set up, ('Nominee fee') with an additional £1,000 per annum supervision cost. ('Supervisor fee') Perhaps now you can understand why they are so keen to sell this scheme! It's boilerplate stuff, and money for old rope.

Payment methods for IVAs

This is where some Insolvency Practitioners differ — and quite dramatically. The difference is less in the fee as in the method used to collect the fee. For instance, some practitioners will require payment of their 'Nominee fee' in full before they agree to act on your behalf; others will require a substantial deposit, with the balance payable on the acceptance of the Arrangement.

Others will collect their fee from you during the 'dead' period which elapses prior to your proposal being accepted or declined:

Insolvency Practitioners who charge by this method have come up with a cunning wheeze to make their fee both attractive and affordable: an IVA will typically take at least three months to get off the ground, during which time you will have suspended paying your debts. So by rights you're paying nothing, and are in comparative financial clover. However, your Insolvency Practitioner will ask you to begin making your proposed monthly payments with immediate effect, i.e. before your IVA is accepted and while the 'Interim Order' is in place.

Instead of passing the money on to your creditors, they will keep the money to cover their 'Nominee fee'. So, for example, if your proposed monthly payment is set at £700, your Insolvency Practitioner will have collected £2,100 from you even before the scheme is up and running. Clever, hey?

An obvious drawback to this method of payment is that if your proposal fails, then you've lost your money.

The best IVA route

The CCCS and Citizens' Advice hold a list of Insolvency Practitioners who DO NOT charge up-front fees. They instead take their fees out of the fund on a month-by month basis. This 'pay as you go' system is by far the fairest, because it eliminates the financial hardship and risk incurred by up-front payments.

Applying for an IVA

I'll say it again. Before committing to an IVA, it is vital that you first take advice from either the CCCS or the Citizens' Advice Bureau. Bear in mind, however, that they can only advise you on a course of action based on what you tell them. Furthermore, these people aren't infallible. The final decision has to be yours.

If you think an IVA might be your best bet, the CCCS is able to recommend a suitable practitioner, who will not ask for money up-front. Alternatively, look in your local Yellow Pages or online under 'Insolvency Practitioners' and approach a few practitioners to discuss your position.

Many Insolvency Practitioners will advertise nationally, often via local agents, who are paid a commission for finding you. As a next step, the insolvency practice or their agent will encourage you to travel to some distant location to meet a practitioner. This is an unnecessary waste of your time and your money.

There really is no point in using an out of town practitioner, unless they are able to offer a service or payment plan that you are unable to find locally. So, wherever possible, always use a local practitioner, or at least one who doesn't expect you to travel to them. Don't be fooled into thinking that you will receive a better service elsewhere - it's just their way of getting the mountain to come to Mohammed.

Having assessed your circumstances, a reputable practitioner will advise you against an IVA if he or she thinks it is unworkable. The CCCS can recommend a practitioner who will be happy to advise you free of charge and whose standards of service have been approved by the CCCS. Although the Insolvency Practitioner charges fees for setting up and managing the arrangement these will come from the amount(s) you agree is to be made available to the creditors. The only costs you will have to pay before an arrangement is set up are fees of £120 in obtaining the Interim Order.

To sum up

In very specific circumstances, an IVA can be the proverbial cat's ninth life. And there are two specific scenarios where an IVA can be preferable to going bankrupt:

1/ If you own your own home and there is sufficient equity in the property for the official Receiver to force a sale, (and you're unable to raise the equivalent amount from friends or family to save your home) effectively leaving you homeless if you were to go bankrupt.

But even in this scenario, an IVA should only be used as a final resort.

Because if in all other respects bankruptcy is your best course of action, there is very good chance that you will be able to keep your home. (Even if you are behind with your mortgage — lenders tend to be reasonable about rolling-up missed payments, because repossession is costly. See section below.) The Official Receiver will always allow you time (at least one year) to realise the equivalent sum of the equity from other sources, enabling you to retain ownership, despite being bankrupt. (See next section for a more thorough explanation: 'What Happens to my Home.')

And the second scenario:

2/ If you have a business that you believe can be turned around. Perhaps you've devoted a chunk of time and money - not to mention emotion — in your enterprise. Perhaps it's your baby and you hate to wave it goodbye. Perhaps you sincerely believe that, given a second opportunity, you can make a go of it. Hmm. Tall order, but not unheard of.

You know, I've heard of instances where people have taken out an IVA as a cynically contrived stopgap to get their creditors off their backs, including the Inland Revenue and Customs and Excise. They've then gone on to milk their businesses of capital and assets in the knowledge that, in all likelihood, they would go to the wall a year or two down the line, along with the IVA! It happens!

In my experience, it is unwise to resort to an IVA merely as a 'painless' alternative to bankruptcy. Firstly, it isn't as painless as you might be led to believe. You're effectively committing yourself to a five-year austerity plan; you are likely to lose the equity in your home and, to cap it all, your debt isn't finally written off for five years, after which time it will remain on your credit file for a further six years. You will also have a legal responsibility to inform your Supervisor if your earnings increase or you have a windfall. (Although I've heard of people being less than forthright with their supervisors when it comes to declaring their income during the term of their Arrangement. Enough said.) So in the vast majority of circumstances, it may well be worth biting the bullet, going to the wall and considering...