Background - high street banks are increasingly turning down IVA Proposals (see below) from individuals with personal debt all associated business debt. This is because banks feel they can retrieve more of their monies owed via their own debt management planning (rather than agree to a fixed smaller amount via an IVA). Consequently, it appears that the number of debt management plans (which are essentially an informal negotiated agreement) are not shown in the official bankruptcy and insolvency statistics figures released by the government.
Introduction -an Individual Voluntary Arrangement (or IVA as it has become known) originated from the Insolvency Act (IA) 1986. It is a 'best offer' agreement between a debtor and a creditor and can only be arranged by a qualified Insolvency Practitioner (I.P). Insolvency practitioners are qualified professionals who have passed the regulatory educational qualifications required to practice. There are seven professional bodies in the UK that make up the major of authorisations. They are:-
- Institute of Chartered Accountants in England and Wales (ICAEW)
- Institute of Chartered Accountants of Scotland (ICAS)
- Institute of Chartered Accountants in Ireland (ICAI)
- Association of Chartered Certified Accountants (ACCA)
- Insolvency Practitioners Association (IPA)
- Law Society
- Law Society of Scotland
An IVA is a written contractual agreement, formalised between the two parties, stating that a debtor can resolve their indebtedness via a lower series of debt repayments, agreed over a fixed period (usually 5 years). These repayments are normally considerably less than the original debt and will go to repaying some of the credit cards, loans, overdrafts, council tax areas, tax payments, store cards etc. Monthly payments are calculated based on income minus expenses (disposable income). The payments can typically reduce debt by 30% to 60%. Following repayment of the agreed sum, the debt is legally settled.
Recently, IVA's have been controversially perceived as a method of avoiding the stigma of bankruptcy. The reason it has become controversial as a legal process is because of the huge growth and popularity of individuals opting for an IVA (as opposed to bankruptcy). Media headlines have highlighted a growing cultural shift towards a more cavalier and liberal shift towards debt repayment. However, it may not be suitable for all individuals due to the uniqueness of each debtor's situation and the amount of debt owed to creditors. The size of the debt and its impact on an individuals life bear consideration when finding an appropriate solution. Generally speaking, an Informal Agreement is more appropriate than an IVA for debts under £15,000. The difference being that an informal agreement is not legally enforceable and can be ignored by creditors at a future date.
What is the Application Process? - The implementation process normally takes one to two months. The main steps are as follows:-
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The individual contacts the debt management company by telephone. In most cases, the debt company will send out information or an advisor may call in person if so desired.
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Following a professional assessment of the individuals circumstances, the advisor should recommend whether an IVA is appropriate to the individuals needs or not. The information is then collated outlining income and expenditure and disposable income that form the basis of a possible repayment proposal.
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This proposal is then presented to the creditors at the Creditors Meeting by the I.P. 75% (in value terms) of the creditors must approve the proposed IVA agreement for it to become binding. The creditors are unlikely to actually attend the meeting. It would normally send their votes via post or fax. The creditors also have the right to reject any the proposal put forward.
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Once the private agreement is agreed and signed, it becomes possible to apply for a court application for an Interim Order can stop other creditors contacting the individual or charging additional interest or threatening court action. The I.P's supervisory role is to check the terms of the creditors meeting are met on an on an annual basis. Monthly payments must then be made for 60 months until the entire agreed amount is settled. During the period the financial status and circumstances of the individual are assessed to see if there has been any change.
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At the end of the five years, assuming all repayments have been met as per the terms of the agreement, the debt is considered written off (known as a composition of debts). The total repaid will have been less than the original debt have an IVA not existed.
The Advantages of an IVA - are as follows:-
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Eliminates stressful uncertainty as one fixed monthly amount is agreed for 60 months, which results in the end of the debt.
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Only 75% of the creditors need to agree the plan.
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No more interest and loan penalty charges can be added following agreed approval date.
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No need for an employer to be formally told of the existence of the IVA.
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Total debt is reduced via the process of negotiation by the Insolvency Practitioner.
The Disadvantages of an IVA -are as follows:-
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The amount of debt reduction of a typical IVA varies according to your individual situation and information you provide to the Insolvency Practitioner.
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The regular payment is unmoveable and all monthly payment deadlines must be made on time to avoid bankruptcy.
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An IVA does not always work for debtors who fail to meet the pre-agreed repayments.
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If you have any equity in your home, you may be required by the agreement to release part of it.
Getting Expert Help - it is difficult to know where to start and which type of company to trust to seek advice from.Aggressive advertising from non-regulated debt management companies boast of 75% debt reduction. These may take a fee or a % of the negotiated IVA settlement and may have shareholders to satisfy. These organisations should have been approved to trade by a public recognised body. For instance, any organisation offering individual financial advice, lending money, administering agreements or providing debt counselling needs a Consumer Credit Licence from the Office of Fair Trading. There are also non commercial, impartial, Government charities set up to help individuals in debt, by offering free advice on the phone or face to face. The following are the main free advice, UK based organisations:-
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The Citizens Advice Bureau (CAB) - this is the largest, grant maintained charity offering confidential advice (including debt related areas) with over 2000 branches.
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National Debtline - a grant funded telephone helpdesk service providing self help information via the post.
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Consumer Credit Counselling Service (CCCS) - this offers specialist and confidential debt counselling, creates and administers detailed debt management plans for individuals. Its focus is one less formal repayment plans.
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Payplan - provides a range of debt solutions, funded by the credit industry.
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The UK Insolvency Helpline - the largest professional network of lawyers and accountants specialising in money advice in the UK.