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 is a minimum level of debt (usually around £7000, although this can vary) and a minimum level of disposable income before an IVA can be considered. Once we have conducted a full assessment we will discuss this further in more detail.
Can we set up the IVA?
No. An IVA is 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 will then send the IVA proposal to your creditors and arranges a formal ‘creditors’ meeting’. The creditors will then have the opportunity to vote on whether to accept the IVA.
If 75% of the total value of your creditors agree to the proposal your IP will supervise the arrangements and ensure that you make the agreed payments.
The advantages of an IVA
- An IVA usually lasts for five years and at the end you will be debt free. Please note only unsecured debts within an IVA can be written off at the end of the term. Any debts not included in the IVA will remain outstanding.
- Creditors are unable to make direct contact with you.
- You can have a payment break for up to six months for a valid reason and this can only be agreed by the Insolvency Practitioner. Obviously any payment breaks will increase the term of the IVA.
- If you are a sole trader or partner you can continue to trade and earn income which will go towards repaying creditors. They are unable to pursue your personal assets.
- An IVA is less restrictive than bankruptcy, for example you can continue to use your bank account.
- If you’re in a profession such as the education sector, financial sector or police going bankrupt could lose you your job so an IVA could be preferable but not always.
- You will be allowed to keep your house but you may be asked to use your equity (if available) at the end of the term to clear your debts.
The disadvantages of an IVA
- Bankruptcy only lasts for one year, whereas an IVA lasts for Five.
- Your credit rating will be affected for 6 years.
- 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 remain outstanding at the end of the IVA term. Your priority bills must be maintained throughout the term of the IVA.
- 75% of the total value of your creditors must agree to the IVA so there is no guarantee of approval.
- The IVA is a legally binding agreement so your payments must be maintained as breaking the arrangement could result in bankruptcy.
- The insolvency practitioner administering the IVA may insist on equity in your home being released to pay off some or all of the debt. 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.
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.
Enjay 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 £40,000, with contractual repayments of £600 per month.
An Insolvency Practitioner (IP) assesses that the client can only afford to pay £350 towards the debts.
An IVA is agreed by all the creditors- £350 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 £21,000 and the remaining £19,000 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 £25,200.