An Individual Voluntary Arrangement, known as an IVA, is a debt management solution for individuals that may be struggling to make large repayments on a number of loans. It is seen as an attractive alternative to the conditions attached to bankruptcy and can help people significantly reduce their monthly outgoings, But as well as being beneficial to the individual, creditors are also likely to benefit from someone in serious debt seeking an IVA.

Creditors usually prefer an IVA over bankruptcy because they will recover more of the debt. This means that although creditors need to vote in favour of allowing a debtor to take out an IVA (a 75% majority, with those creditors most indebted having a larger stake in the votes), people with a serious risk of resorting to bankruptcy are likely to be approved should they seek an IVA.

The benefits to the individual making the repayments can also be ideal depending on your circumstances. First and foremost, you will have much larger control over your home. If made bankrupt you may be forced to sell your home. While an IVA may recommend you re-mortgage your house or need informing should you sell your home, your home will not be at the risk that bankruptcy places it in.

Bankruptcy also makes it difficult to obtain further credit. For people who are self-employed this can be especially troublesome, as having to declare yourself bankrupt while seeking credit may place your business in even further trouble if it is refused to you.

Of course everyone’s personal circumstances are different, and there may be occasions when bankruptcy is preferable or unavoidable. But IVA is usually a better deal – for creditors and debtors. Because of the complex nature of setting up an IVA, seeking expert help is an absolute must, as is finding a representative you can trust to put your interests first.

You can apply for an IVA online. Find out more and start your application today.

It has long been standard practice for creditors to require of a debtor who owns property and who enters into an Individual Voluntary Arrangements (IVA) with them that he or she should take steps to release some part or even all of the equity in that property and to contribute all or some of the proceeds into the IVA. The debtor may already have anticipated that creditors would insist on this being done and may have already addressed any equity in their property in their IVA proposal. One of the benefits of an IVA from the debtor’s perspective is that the debtor does not usually lose their home provided that they can address the equity appropriately and to the satisfaction of their unsecured creditors. In Bankruptcy loss of the debtor’s home is almost inevitable if there is any realisable equity therein.

When a debtor who owns a property fails to address any equity therein in their IVA proposal, the usual approach taken by creditors is to modify the IVA proposal requiring them to do so. The modification generally spells out how this is to be done and how much of the equity is to be contributed. Such a modification usually requires the supervisor to obtain at least one but usually two independent valuations of the relevant property in the fourth or fifth year of the IVA. The debtor is usually further required to obtain at least one offer of re-mortgage on the property and to contribute at least 75% and sometimes up to 100% of their share of the equity in the property into the IVA. Where the property is jointly owned, as is usually the case when the property is the marital home, then the question of the debtor’s equitable interest in the property arises and this is dealt with at the end of this article.

Every IVA is different from every other one and there can be significant variation in how different creditors require equity to be addressed. A number of issues may arise when the time comes for the ‘fourth year modification’, as it is frequently described, to be implemented. The property, at that point in time, might be in negative equity or zero equity. The equity might be so small that that the costs of realization would wipe it out. Even if there is some equity in the property, the debtor may find it impossible to obtain a re-mortgage for various reasons such as the credit crunch, a poor credit rating or lenders putting a cap on the loan to value (LTV) ratio for example. In addition, even when there is equity available in theory, it may be impossible to realize it in practice. It may also be that ‘high street’ lenders, who normally quote the best mortgage interest rates, will not offer a re-mortgage at all and that only ‘sub-prime’ lenders are willing to do so and then at adverse interest rates, with the consequent long term effects on the borrower’s finances.

What can the debtor do, given that failure to contribute an equity lump sum would depress the dividend payable to creditors significantly? The usual solution is for the debtor to offer a variation proposal to creditors. Such a variation can simply request the removal of the ‘equity’ modification, allowing the debtor to successfully complete the IVA without making any equity contribution. If creditors were to accept such a variation, they would receive a dividend similar to that originally proposed but less than that required by the creditor modification. Alternatively, the debtor may offer a variation proposal offering to extend the term of the proposal for up to one additional year and to make additional monthly income based contributions in lieu of any equity in the property. While extending the arrangement by up to one year may not be attractive for the debtor or indeed for the creditors, it is probably preferable to re-mortgaging at adverse rates, which is likely to have long term negative financial consequences for the debtor. Creditors of course retain the right to reject or modify any variation proposals put forward by the debtor but extending the term, with additional monthly contributions being paid in lieu of equity, is frequently acceptable to them.

The insolvency practitioner (IP) supervising the IVA will advise the debtor on the available options regarding addressing equity and creditors are generally sympathetic to debtors who are genuinely attempting to address their financial affairs.

The term ‘Beneficial Interest’ is used to describe the equity in a property which belongs to the owner or part owner of that property. The marital home is usually but not always owned by the husband and wife or indeed by cohabiting persons on a 50-50 basis i.e. each party owns 50% of the equity in the property and if there is no mortgage or other interested party, each spouse or partner will own 50% of the value of the property. When this is the case, each of them can be said to have a beneficial interest of 50% of the value of the marital home or perhaps more accurately, of the net equity in the property. The split of beneficial interest however, need not be 50-50. Depending on circumstances it could be any mix of ownership e.g. 70-30 or even 100-0.

The term ‘Beneficial Interest’ is frequently used in the context of bankruptcy where the bankrupt person partly owns a property, often the marital home. In cases where there is little or no equity in the property the bankrupt may be able to buy back his (or her) beneficial interest in the property for a nominal sum, perhaps 1, plus any legal costs of the transaction. Such a buyback of beneficial interest prevents the Official Receiver or Trustee from doing nothing in regard to dealing with the property for several years and then revaluing the property just before the three years that are allowed for action have passed and taking any equity which may have grown in the property in the meantime.

Discover all you need to know regarding IVAs and whether they will be a good choice for you. If you are a house owner, you may be subject to a Fourth Year Valuation, however this will be discussed prior to you making any decisions.

The insolvent debtor who gives a proposition for an Individual Voluntary Arrangement (IVA) to his or her (unsecured) lenders is indeed in the lap of the gods. This is because the lenders have got all the influence in the matter and may choose to accept the offer as it stands, to deny it out of hand or to demand alterations to the proposal which often might have the outcome of costing the borrower much more than they meant to give. Actually this third outcome can carry within it the seeds of the failure of the IVA in its supervision phase, if the creditors are too grasping or greedy at the voting stage. The unfortunate debtor may feel pressurized to sign up for changes that involve larger contributions to the IVA compared to what he or she can manage.

Thus there are three options open to lenders: to simply accept the proposal as it stands, to accept it subject to the borrower agreeing to (sometimes draconian) changes or to refuse the proposal. Only unsecured creditors can vote at the meeting of creditors. Yet, there can occasionally be a chink of light for the borrower if he or she has the ‘right’ combination of lenders and if the ‘right’ lenders vote. First of all not all of a debtor’s creditors need to vote for a choice to be made approving, rejecting or altering the debtor’s IVA proposal. In reality as long as a single lender votes, a decision can be made. That is of course so long as all the unsecured creditors had the chance to vote.

Assuming then that more than one lender chooses to exercise their right to vote, what is the degree of endorsement needed for the IVA to be approved? A simple way to view it is that each lender has one vote for every that the person in debt owes to that lender. Therefore if there were eight creditors known as A,B,C,D,E, F, G and H, to whom the debtor owed an overall total of 100,000 in the respective sums of say 40,000, 26,000, 14,000, 8,000, 5,000, 4,000, 2,000 and 1,000 there would be as many as 100,000 votes, if all creditors decided to vote. In the real world not surprisingly, only some creditors exercise their right to vote. Of those that do vote, no less than 75% of the cast votes must be in favour of the IVA for it to be approved and to be binding on all the creditors, which includes those who did not vote. Let’s look at some examples of how the vote might go.

Lender A: 40,000 Creditor B: 26,000 Creditor C: 14,000 Creditor D: 8,000 Creditor E: 5,000 Lender F: 4,000 Creditor G: 2,000 Lender H: 1,000

Assume that just creditor H chooses to vote and accepts the proposal, then that decision is binding on the rest of the creditors and constitutes 100% approval.

Suppose lender B votes to reject the offer with all other lenders voting to consent to it, then the offer is rejected as just 74% voted to accept it and that decision is binding on all lenders.

Suppose creditor E votes to accept the proposal and creditor H votes to reject it and none of the other creditors cast a vote, then the proposal is accepted as that constitutes over 83% acceptance and that decision is binding on all creditors.

Finally suppose creditors A & B vote to accept the proposal and all other creditors vote to reject it, then the proposal is accepted with 76% voting for it and that decision is binding on all creditors.

Plainly there are numerous alternative possible voting scenarios in this sample case. Everything is determined by whether creditors decide to vote, on what their relative voting strengths are and of course on exactly how they choose to vote. The nominee is responsible for summoning creditors to the meeting of creditors but even a creditor who has not received notice of the meeting remains bound by its final decision. However a lender who didn’t receive notice of the meeting may dispute the final decision of the meeting on one of two grounds: that the accepted IVA unfairly prejudices their interests or that there has been some material irregularity at or in regards to the meeting of creditors. There are deadlines for a creditor to make this sort of challenge.

Creditors frequently propose modifications to a debtor’s IVA proposal. Many such modifications are intended to increase the estimated dividend to creditors. They may for example require the debtor to make higher monthly payments than originally proposed or to contribute a lump sum from for example the release of equity from re-mortgaging a property. The debtor may choose to accept such modifications, to suggest alternatives to the modifications or to refuse to agree to some or all of them, usually giving reasons why they are not acceptable. The chairman of the meeting will discuss the debtor’s response to modifications with the creditors and creditors may choose to alter or even remove the modifications, where the debtor has made a compelling case. However, if the debtor refuses point blank to accept the modifications and creditors are not amenable to altering or removing them, then the proposal is usually rejected.

The last option open to lenders is a straightforward rejection of the debtor’s proposal as is their prerogative, because they did furnish credit to the debtor and can demand that it be entirely repaid provided that their decision is made in compliance with the principles of dealing with their client fairly. In rejecting an IVA proposal outright, lenders may feel for example that the IVA proposal is a totally inadequate effort at repayment or they may think that the prospects of the borrower adhering to the conditions and terms of the IVA are poor.

National Debt Relief is helping A huge number of clients tackle their debts monthly. Specialising in the IVA and Debt Management/Debt Management Plan, we are able to successfully place you through the legally binding or even a flexible plan tailored to suit your circumstances. We do not charge upfront fees for our IVAs/Individual Voluntary Arrangements.