What is individual voluntary arrangement?
What is an Individual Voluntary Arrangement (IVA)?
An Individual Voluntary Arrangement (IVA) is a contract between a debtor and their creditors which agrees how the debtor’s debts will be resolved. The debtor will prepare, with the assistance of an Insolvency Practitioner, a proposal to their creditors as an offer of settlement. Whilst the contents of the proposal are not prescriptive, normally it will include monthly contributions from surplus income, the release of equity from property interests, and the realisation of any assets not required by the debtor to live their day to day life.
The exact proposal made will usually be discussed and agreed with an Insolvency Practitioner, who will work with the debtor to ensure that the proposal is fair, and complies with legislative and best practice guidance. At this stage the Insolvency Practitioner will assume the role of Nominee.
The proposal will then be circulated to the debtor’s creditors, who will vote on the proposal. The proposal requires the approval of 75% of the debtor’s creditors by value. Where the debtor has connected creditors, such as family members, a second round of voting will be held where connected creditors are not entitled to vote, although at this stage the support of in excess of 50% of the debtor’s unconnected creditors is required.
If approved, the IVA will commence and the debtor will be obliged to follow the terms proposed. The debtor’s creditors will be bound by the terms of the IVA and will receive dividend payments from asset realisations. The insolvency practitioner will cease acting as Nominee and will become the Supervisor, and work to ensure that both the debtor and the creditors act in accordance with terms of the IVA proposal and in accordance with the Insolvency Act 1986 and the Insolvency (England & Wales) Rules 2016.
Is an IVA suitable for me?
IVA’s can be utilised by individuals with all levels of assets and liabilities, if they are able to prepare a suitable proposal. Dependant on the individual’s circumstances, it is possible that an alternative solution may be better for their individual circumstances.
It is therefore best for an individual with concerns over their financial affairs to speak with an Insolvency Practitioner who can summarise all their options and explain the pros and cons of each process.
Benefits of an IVA
An IVA is a formal insolvency process supported by Insolvency legislation. As a result, if the necessary majority of creditors agree to the debtor’s proposal, all creditors are bound within the arrangement. This prevents any creditor from taking further recovery action against the debtor while the arrangement is in effect and, if the IVA is successfully completed, this will settle the debtor’s indebtedness in full.
This may therefore provide comfort to debtors who are facing significant creditor pressure, such as a High Court Enforcement Officer seeking to uplift assets on behalf of the debtor’s creditors. It also provides the debtor with a structured all-encompassing solution to their indebtedness, allowing him or her to focus more fully on their family and careers.
In addition, as the debtor prepares the proposal, with assistance from an Insolvency Practitioner, it is uniquely tailored to the Debtor’s individual circumstances.
Risks of an IVA
As an IVA is a formal insolvency process, it is the responsibility of the Supervisor to ensure that the debtor complies with the terms of his proposal. If the debtor fails to meet their obligations the Supervisor will be obliged to take steps, as outlined in the proposal, to rectify the situation. This can include failing the IVA, and therefore ending the protection the debtor has under its terms, and creditors will commonly require that the IVA contains a provision that the Supervisor must issue a petition for a Bankruptcy Order against the debtor in defined circumstances where the debtor has failed to meet his commitments.
Additionally, an IVA will be recorded on your credit record and will impact on your ability to obtain credit, although notably, it is unlikely that under the provisions of an IVA you will be allowed to obtain credit in excess of £500 during the term of your IVA without the express permission of the Supervisor.
It is therefore important that the debtor fully understands the terms of their IVA and the Nominee will discuss these in detail with the debtor, prior to circulating the proposal.
What are the costs and fees for an IVA?
The terms of an IVA will provide for the payment of two fees to an insolvency practitioner – a Nominee’s fee and a Supervisor’s fee. Additionally, there will also be some expenses that are required to be paid by statute – for example the Official Receiver’s IVA registration fee.
The Nominee’s fee is usually a fixed fee and will be proportionate to the debtor’s circumstances and the complexity of the work required to prepare the debtor’s proposal for an IVA. Where a debtor’s affairs are relatively straightforward, the fee will usually be less than where a debtor has more complex affairs and assets, such as investments, property portfolios, shareholdings and so forth, where the debtor’s circumstances will require more analysis to formulate the IVA proposal. These fees can be met from asset realisations, although where significant work is required to prepare an IVA proposal, the Insolvency Practitioner may seek a payment on account prior to drafting the proposals.
The Supervisor’s fee will normally be charged on a time cost basis – which means that the Supervisor will seek to recover the time spent by him or her and their staff in supervising the implementation of the terms of the IVA proposal. However, it is common for creditors to restrict Supervisor’s fees, usually to a percentage of realisations. These fees are usually met from asset realisations over the course of the IVA.
The insolvency practitioner will always provide an initial free consultation and usually at this stage will be able to indicate what fees, if any, will need to be paid up front for work to continue.
Will my creditors have to agree to the IVA?
Yes, an IVA requires the support of your creditors. The requisite majority for the first round of voting is 75% by value of creditors who vote at the decision procedure convened to consider your IVA proposal. If you do not have any connected creditors (such as family members), this will be the only round of voting.
If you have connected creditors, a second round of voting will take place which the connected creditors do not participate in. You will need in excess of 50% by value of the unconnected creditors who vote in the second round of voting to support your IVA proposal for it to be approved.
The IVA proposal should reflect your best offer. It may be that with minor adjustments to its terms creditors will support the IVA. However, this may require the adjournment of the meeting of creditors called to consider the proposal to allow negotiations to take place.
How will an IVA affect my job?
An IVA is mostly likely to affect your job if you are a professional, as the regulatory bodies for any professions place restrictions on professionals working whilst insolvent. It will therefore be important to work with your Insolvency Practitioner to establish what the consequences of entering into an IVA will be.
If your employment does not place any restrictions on your financial affairs, you will not need to disclose your IVA to your employers, unless it is required as part of your employment contract.
Is an individual voluntary arrangement the same as a debt management plan?
An IVA is different from a debt management plan (“DMP”) as it is a formal insolvency procedure. Once your proposal is accepted, as long as you comply with its terms, your creditors will remain bound by the arrangement.
A DMP is an informal arrangement and can be cancelled at any time by your creditor(s). It is also does not prohibit your creditors from taking alternative enforcement action, such a seeking a charge over your residential property.
Is a DMP better than an IVA?
This entirely depends on your individual circumstances. An Insolvency Practitioner would provide a free consultation and would be able to provide an immediate steer, based on your circumstances, as to which offers the better resolution for you.
How does an IVA affect my credit file?
An IVA will be recorded by your creditors as a default and will remain on your credit file. As a result, finance companies will see that you have defaulted on prior arrangements, and this will inform their decision as to whether or not you will be provided with further finance facilities.
Do IVA check bank statements?
Yes. An Insolvency Practitioner will need to review your bank statements for the period prior to you proposing an IVA and periodically during the course of your IVA.
The Insolvency Practitioner require full disclosure of all your affairs and dealings as they are obliged to ensure that your proposal is the best available for your creditors, and that it continues to remain the best offer available for your creditors.
Can I go on holiday while on IVA?
You can go on holiday during your IVA. However, creditors will not expect or accept debtors paying for lavish holidays in order to maximise funds available to be introduced into the IVA for the benefit of creditors.
Should a family member or friend wish to fund your holiday from their own funds, this would be acceptable.
Can you build your credit score while in an IVA?
Your credit score is unlikely to improve during an IVA as your IVA will have an adverse effect on your credit rating, and you will likely not be repaying your creditors outside of the IVA, other than, for example, your mortgage.
How to apply for an IVA
To apply for an IVA you should approach an Insolvency Practitioner to discuss your affairs. They will confirm if an IVA is suitable for you and, if so, assist you in preparing the proposal to ensure that it is compliant with all relevant legislation.
If you require further advice or simply need further clarification, give our team a call today on 0113 242 0808 or e-mail advice@chamberlain-co.co.uk