How does an IVA work?
A licensed Insolvency Practitioner negotiates a legally binding agreement between you and your creditors that allows you to pay back what you can afford over a fixed period, usually 5 years.
Which debts can be included in an IVA?
Normally any unsecured debts can be included within an IVA. These include but are not limited to:
- Credit Cards
- Personal Loans
- Catalogue Debts
- Store Cards
- Outstanding balances after home or vehicle repossession
- Business loans for which the client is personally responsible
- HMRC debts
The following cannot be included:
- Secured debts such as mortgages and other secured loans
- Hire Purchase
- Rent and Council Tax arrears (unless from a previous property)
- Student Loans
- Any fines or penalties arising from criminal activity
- Child maintenance arrears
- Tax credit/Benefit overpayments
Can I keep some of my debts out of the IVA?
No. You cannot favour one creditor over another. All your unsecured debts including loans, credit cards, store cards, overdrafts, tax bills and even some old utility bill debts will have to go into the IVA.
If you continue to have credit outside the IVA you risk the IVA failing and potentially bankruptcy. It is important that you are open and honest with the creditors as they are after all writing off a large amount of your debt.
How much will I pay each month?
You will only pay what you can afford each month.
Basically you pay what is called your 'Disposable Income' - that is the money you have left after you have paid for all your essential and reasonable living costs.
Creditors do have limits to what they accept on spending, as of course they will get less money if you are spending more on living costs, but provided the costs are justifiable and not excessive these can be presented to creditors.
Is my house safe?
One of the main benefits of an IVA over Bankruptcy for a Homeowner is the fact that under an IVA the sale of your home cannot be forced, whereas, under the terms of a Bankruptcy homeowners may be forced to sell their property.
Under the terms of an IVA if you own a property and have equity in the property, you will be required to release some of that equity by re-mortgaging. This amount will be used to top up your IVA payments or in certain circumstances will be used as the full and final repayment of your IVA. Where equity is due to be released from a property the Insolvency Practitioner will take into account the extra revenue needed to fund the increased mortgage, so the proposed mortgage is affordable.
The time you release this money from your property will be determined by the insolvency practitioner. It could be at the early or later stages of the IVA. Penalty charges, ability to pay, the 'loan to value' you have currently and other factors will have to be taken into consideration.
Releasing money from your property may mean that the IVA will be for a shorter amount of time. i.e. rather than the Standard 60 months, it could be for a period of 48 months, 36 months,12 months or in some cases forming a full and final repayment of your IVA.
If you sold your property during an IVA you will be required to put all your profits from your property into the IVA. There are certain circumstances where some of the profits can be kept, but this would have to be properly justified.
If you have negative equity in your property, you can still be eligible for an IVA. However in this case there is less likelihood of you releasing equity into an IVA during the term. In this scenario, your IVA is more likely to last for 60 months and will be entirely dependent on you having sufficient disposable income to make a reasonable IVA proposal to your Creditors.
Is my car safe?
Under the terms of an IVA car owners will not have to give up ownership of their cars as long as they can show that the car is a reasonable necessity to their lives. Examples of this would be someone who needed their car to carry out their job or to get them to and from work every day. Furthermore the car must not be an extravagance; high value cars would need to be justified.
If there is a hire purchase (HP) arrangement on a car and the expense is reasonable, the HP can be included within the monthly expenditure budget. However, in the majority of cases if the HP arrangement expires prior to the completion of the IVA then the extra funds then available would have to be paid into the IVA each month. This can be useful, as it makes the IVA proposal more attractive to creditors..
What if some of my creditors do not agree?
If 75% or more of the debt agrees to your IVA, then your IVA will be approved and all creditors are legally bound by it. A creditor is only included in the 75% calculation if they vote, so it is important that all of them vote.
This means that if most of your debt is with one creditor then they will have the most powerful vote. This can make a difference if you have a more awkward creditor, or one who asks for a bigger minimum % to be repaid.
Can the IVA be shorter than 5 years?
Usually an IVA lasts for 5 years, though this is not set in stone. Sometimes if a debtor struggles during the IVA or is not able to raise equity in a property as had been planned, then an extra year may be added instead.
You can do a full and final settlement IVA which can be completed in a few months. This is where you can raise a lump sum of money either from a friend or family member, a savings plan or the sale of a property. This is offered to the creditors as a full and final settlement for your debts.
How long does it take to set up an IVA?
On average it takes 4-6 weeks from the time we receive all your paperwork. This can take longer, but usually the careful preparation of your paperwork and budget illustration usually ensures that the process is smooth.
The insolvency practitioner would advise on this, but usually debtors do not make their normal contractual payments during the set up period.
Your creditors may still call you during this time, but once the IVA is accepted the calls will stop and the creditors will take no further action.
What Happens When I Stop Paying My Creditors?
Once you have decided that an IVA is the solution best suited to you, the Insolvency practitioner will tell you to stop using all of the accounts you hold with the creditors and may tell you not make further payments to them. This includes any bank accounts with companies which you owe money to.
Whilst the IVA is being prepared you will still receive letters and phone calls from your creditors chasing payment on the accounts held with them. If this happens then you can inform them that you are in the process of proposing an IVA and give them the contact details of the insolvency practitioner. Any further problems with the creditors should be referred to the insolvency practitioner.
Once the IVA is agreed, your creditors are no longer allowed to contact you as it is a legally binding agreement. This means that you are free to concentrate on the other important things in your life such as your family and your job.
What if my circumstances change during the IVA and I cannot make the payments?
It is important for you to be in close contact with your Insolvency Practitioner (IP) if there are any changes, good or bad.
The IP will have an annual review with you to update your details, but it is very important for you to be open and upfront about any changes as they happen.
The IP can renegotiate with your creditors at any time and be aware that if you can afford to pay more, then they will expect you to pay more - after all they are writing off a large amount of money.
Why would creditors accept writing off some of my debt?
When IVA's were first set up in the late 1980's it was partly for people who could not go bankrupt due to the type of job they had, e.g. lawyer, accountant, police officer, armed forces etc. The IVA meant creditors would not bankrupt these people so they would not lose their job.
The IVA is simply a better deal for creditors. If you were to go bankrupt the creditors would get much less money. In addition the creditors would then have an independent professional monitoring and managing your payments your insolvency practitioner.
My bank is a creditor; will I be allowed a bank account?
You will probably need to open a new bank account, but your insolvency practitioner will confirm this. You cannot usually bank with a creditor that you have a debt with in the IVA.
You will need a basic account only that has no overdraft facility. Every bank has a basic account now, so you will be able to get one.
What happens after my IVA has completed?
Provided you have met the terms of the agreement and maintained your payments, your creditors will write off the remaining debt and you will be debt free.
You are then in a position to start building up you credit score and could potentially borrow money in future. However all further borrowing should be carefully considered so that you do not end up in the same situation again in future.
How much does the IVA cost?
There are fees involved in an IVA, but these are taken from the normal monthly payments into the IVA. The supervisor of the IVA will be a licenced insolvency practitioner who will negotiate this with the creditors involved before the IVA is agreed.There are 2 types of fees charged by the insolvency practitioner during an IVA;
- Nominee's fees
- Supervisor's fees.
The amount of these fees will vary depending on the debtor's circumstances, but will be agreed by both the debtor and the creditors before the IVA is approved.
Nominee's fees: This fee covers all the work which is done leading up to a proposal being considered by the creditors. This includes the drafting of a proposal which includes the production of a comprehensive statement of affairs, the gathering of all key documentation required and extensive analysis of the documentation to ensure that an IVA is both acceptable to creditors and sustainable for the debtor. This is followed by a meeting with the creditors and consideration of any changes requested by creditors. The IVA will only be approved if both the debtor and the creditors agree on any changes. The nominee fee varies depending on how much is paid into the IVA, but is approximately £1100 (information confirmed January 2016).
Supervisor's fees: This fee is paid to the IP and covers all the work which is done after the proposal is approved in supervising the IVA and paying the creditors until the IVA is concluded. The supervisory fees are normally capped by creditors at between 15 and 20% of realisations and are drawn monthly from the monthly contributions. The IP will explain all of this fully to the debtor before the IVA is agreed.
Where a customer wants to apply for an IVA, IVA.com Group can provide the initial advice, gather basic information from them and pass this with the customers consent to a licenced insolvency practitioner. If the IVA is later accepted IVA.com Group will receive a referral fee from the insolvency practitioner.
Can I still run a business while in an IVA?
Yes you can. Your IVA can run separately from your business.
It is a more complicated process when you are self-employed, but as long as you have kept your accounts and tax returns and are able to provide a forecast trading document for the coming year, then it is still possible to do an IVA.
Will this affect my credit rating?
All credit activity is recorded on your credit file for 6 years and an IVA will be recorded there. As such this will affect your ability to obtain credit. Further borrowing is not permitted during and IVA so in some ways this acts as a measure to stop things from getting worse.
You can rebuild your credit score in future and once your IVA is completed you will be able to get credit again, but this may take time. Often the IVA process really helps people to budget within their means so that in future they are much better equipped to manage their finances without needing credit.
Who knows that I have an IVA – is it made public?
Unlike a bankruptcy your name and address will not be published in the London Gazette. The IVA is a private and discreet procedure. No-one is informed about the agreement other than the creditors themselves and possibly your mortgage provider if they get involved.
The IVA can therefore be used by professionals, forces personnel and the police without damaging career prospects.
It should be pointed out that the IVA will be entered onto the government insolvency register which is a searchable public database.