What is an IVA?
Who should use an IVA?
What debt can be included?
How does an IVA work?
A Full and Final IVA
Advantagesof an IVA
Disadvantages of an IVA
What will an IVA cost?
Individual Voluntary Arrangement (IVA)
What is an IVA?
An Individual Voluntary Arrangement (or IVA) is a legally binding agreement designed to help someone who is struggling to repay serious debts. The IVA allows a debtor to make an offer to repay as much of their debt as they can in the form of either a one off lump sum or reduced monthly payments over five years.
If this offer is accepted, Creditors agree to stop any additional interest or late payment charges for the duration of the agreement. They also agree to write off any debt left outstanding once the agreement has finished.
Who should use and IVA?
The IVA is for use by individuals. It cannot be used by limited companies or PLCs.
When the IVA was introduced into the law in the Insolvency Act of 1986, the idea behind it was to help business people who had taken on personal liabilities while trying to promote their business.
An IVA can be used by individuals who can afford to make monthly payments or who can make a lump sum available to use as a full and final settlement. Generally an IVA would be used to resolve debts totalling £18,000 or more.
An IVA is ideally suited to help resolve director's personal debt problems. The reason for this is that you can continue to act as a director while in an IVA. This is not the case with bankruptcy.
If you are a sole trader and your business has failed, it is likely that you owe money not only to the bank and your credit card, but also to trade creditors and the Inland Revenue. Where this is the case, an IVA is an ideal solution as all of these debts can be included in the arrangement. As a sole trader, you can continue to run your business while in an IVA.
Note: The suitability of an IVA to resolve a debt problem caused by business failure will always depend on the individual's circumstances. Before deciding that an IVA is right for you, you must take professional advice.
Why not call Cooper Matthews today for an informal discussion?
What Debt can be included in an IVA
If you undertake an IVA, you need to include all of your personal debts whether they were generated because of your business or not. Here is a list of the type of debts which would typically be included in an IVA:
- Bank Loans
- Bank Overdrafts
- Credit Cards
- Store Cards
- County Court Judgements
- Trade Creditors
- Inland Revenue Debt
- VAT Debt
How does an IVA Work?
An IVA can only be put in place by a qualified Insolvency Practitioner (IP). Insolvency practitioners are qualified professionals who have passed the regulatory educational qualifications required to practice.
Generally, the implementation of an IVA takes between 6-8 weeks. The main steps required to achieve this are as follows:
Step 1: Assess Your Circumstances
An assessment of your financial circumstances should be carried out by an insolvency professional. This will generally involve reviewing the position of your personal income, expenditure, assets and debts.
To be successful, an IVA will require you to either provide a lump sum as a full and final IVA settlement or maintain monthly payments over five years. The assessment of your circumstances is designed to understand how you will afford to pay your IVA.
Contact Cooper Mathews who will be able to initiate this assessment on your behalf.
Step 2: Draft the IVA Proposal
Following a professional assessment of your circumstances, the information is then collated into an IVA proposal which details the amount of money that the creditors are likely to receive during the course of the arrangement. This sum will be based either on a lump sum payment or your disposable income and any assets which will be realised to the benefit of the creditors.
Step 3: Present Proposal to Creditors
Your IVA proposal is then presented to the creditors at the Creditors Meeting by the Insolvency Practitioner. 75% of the value of the creditors who vote must approve the proposed IVA for it to become binding. The creditors have the right to amend or reject the proposal put forward.
Once any proposed amendments are agreed, the arrangement is signed and becomes legally binding on all creditors.
Step 4: Maintain the Agreement
Once the IVA is agreed by the creditors, the payment terms must be adhered to. As long as this is the case, creditors must cease further action against the debtor and can no longer add interest or charges to the outstanding debts.
Monthly payments must then be made as per the agreement and any assets realised. In the case of a monthly payment IVA, after the end of a five years period assuming all repayments have been met as per the terms of the agreement, any outstanding debt is written off.
A Full and Final Settlement IVA
If your business has failed, you may not be in a position to maintain monthly payments into an IVA. However, this does not mean that you will not be able to use this solution.
Very often, business people carry out IVAs using what is commonly known as the lump sum settlement process. If a lump sum can be raised possibly through personal reserves, home equity release or with the help of friends and family, then this can be used so settle the debt in a single payment.
In effect, the settlement of the debts is wrapped up in an IVA so that all creditors are legally bound. Once the IVA is accepted, you will normally have 3-6 months to produce the agreed lump sum. During this time none of your creditors can reappear and demand further payments.
The Advantages of an IVA
There are a number of advantages of using an IVA for company directors and sole traders:
- Unlike Bankruptcy, a Company Director can enter into an IVA and continue to act as director and manage a limited company
- The IVA will put you back in control of your finances. The agreement is either settled at once with a lump sum or is based around a single affordable monthly amount.
- If you are a home owner, the IVA allows you to maintain control of your property (unlike bankruptcy where you may have to give up your title)
- No more interest and late payment penalty charges can be added by creditors following the approval of the IVA.
- The IVA is discreet. The IVA will not be publicly advertised. However you must be aware that the IVA will be listed within the insolvency register which is publically accessible via the internet. As such, depending on the terms of the contract, a company director may need to make it known to fellow directors that they have entered into an IVA.
- Any unpaid debt left at the end of the arrangement is written off leaving the individual debt free.
- Any current creditor action such as County Court Judgements are overturned
The Disadvantages of an IVA
Although there are many advantages, undertaking an IVA is a serious matter. There are some disadvantages which many or many not affect you depending on your circumstances. As such, it is vital to get professional advice before choosing to enter into an IVA.
- If you are a home owner, you may be required to release any available equity for the benefit of your creditors.
- The IVA will be recorded on your credit file meaning that you will be unable to take further unsecured borrowing for the period of the IVA.
- If you fail to maintain the payments agreed within the IVA, it may be at risk of failure and you could be declared bankrupt.
What will an IVA Cost?
There are a number of charges which you will need to be aware of when undertaking an IVA:
Instruction or Drafting FeeIt is common for the Debt Management Company or Insolvency Practitioner to charge an IVA Instruction or Drafting fee. This fee will be charged before the IVA is put in place and will be used to pay for the considerable time and effort needed to get an individual's affairs in order so that they may be presented to the creditors.
You should establish and agree the drafting fee before proceeding with the IVA process.
Nominee FeeThe Nominee fee is the fee charged by the Insolvency Practitioner to act as Nominee when presenting the IVA proposal to the creditors. This is a standard fee taken by all Insolvency Practitioners and is normally between £1500-£2000. The individual going into the IVA will not have to find extra money to pay this fee as it is taken out of the normal monthly IVA payments.
Supervisor FeeEach year that an IVA runs, the Insolvency Practitioner must supervise the arrangement on behalf of the creditors. In return, the creditors agree up front that the Insolvency Practitioner will be allowed to draw a supervisor's fee on an annual basis. As with the Nominee Fee, the individual going into the IVA will not have to find extra money to pay the supervisor fees as they will be taken out of the normal monthly IVA payments. As a standard, over the course of the IVA, the supervisor fees are normally 15% of the total amount collected in from the person paying into the IVA.