What is an Individual Voluntary Arrangement (IVA) and what is its primary purpose in England and Wales?

An Individual Voluntary Arrangement (IVA) is a formal process established in England and Wales as an alternative to bankruptcy for individuals facing financial difficulties. Its primary purpose is to allow individuals to propose a repayment plan to their creditors, thereby avoiding the more severe consequences of bankruptcy.

What is the equivalent statutory debt solution to an IVA in Scotland?

In Scotland, the equivalent statutory debt solution to an Individual Voluntary Arrangement (IVA) is known as a protected trust deed. This provides a similar framework for individuals to manage their debts.

Which piece of legislation governs Individual Voluntary Arrangements (IVAs) in England and Wales?

Individual Voluntary Arrangements (IVAs) are established by and governed by Part VIII of the Insolvency Act 1986. This legislation provides the legal framework for these arrangements, outlining the process and requirements.

How is an IVA proposal presented to creditors?

An IVA proposal is presented to a debtor's creditors through an insolvency practitioner. This practitioner acts as an intermediary, managing the communication and formal process between the debtor and their creditors.

Typically, which types of creditors' claims does an IVA arrangement cover?

Typically, an IVA arrangement comprises the claims of unsecured creditors. It generally leaves the rights of secured creditors largely unchanged, meaning their specific agreements and security interests are usually unaffected by the IVA.

Are there costs associated with setting up and maintaining an IVA?

Yes, insolvency practitioners charge initial and ongoing fees for their services in administering an IVA. These fees are in addition to the debt repayment amounts and are typically paid from the contributions made into the IVA.

What is the contractual nature of an IVA?

An IVA is a contractual arrangement with creditors, meaning it is a legally binding agreement entered into voluntarily by the debtor and their creditors. This contractual nature allows for flexibility based on the individual's circumstances.

On what basis can an Individual Voluntary Arrangement be structured?

An IVA can be structured flexibly based on an individual's circumstances, potentially being based on capital, income, third-party payments, or a combination of these methods. This allows for tailored repayment plans.

Who might be advised to consider a debt management plan instead of an IVA?

Debtors with less serious financial problems, after receiving independent advice, may be advised to consider a debt management plan as an alternative to an IVA. This is often for situations where a formal IVA might be overly complex or unnecessary.

What is the business equivalent of an Individual Voluntary Arrangement (IVA)?

The analogous procedure for businesses that mirrors the concept of an Individual Voluntary Arrangement (IVA) is known as a company voluntary arrangement (CVA). Both are formal agreements with creditors to manage insolvency.

How is a decision made by creditors regarding an IVA proposal?

Creditors make a decision on an IVA proposal at a creditors' meeting. The proposal is approved if 75% of the value of creditors who vote (either in person or by proxy) agree to it.

What is the additional voting requirement if 'associates' vote on an IVA proposal?

If any creditors voting are identified as 'associates' (typically business associates, friends, or family), a second vote count is taken. In this scenario, 50% of the non-associated creditors must also approve the proposal for it to be accepted.

How does the return to creditors in an IVA typically compare to bankruptcy?

The return to creditors in an IVA is often higher than what they would receive in bankruptcy. This is because the IVA is a structured repayment plan that aims to maximize recovery within a defined period.

What was the original intended purpose of Individual Voluntary Arrangements (IVAs)?

IVAs were originally designed to provide relief for debts arising from business insolvency. They were created to offer a structured way for individuals involved in business to manage their financial obligations.

How has the use of IVAs evolved since the late 1990s?

Since the late 1990s, increasing levels of consumer debt have led to many insolvent individuals with non-business-related debts seeking the legal protection offered by IVAs. This reflects a shift in their application from primarily business contexts to personal finance.

For whom might an IVA be particularly popular, and why?

IVAs may be popular with individuals who wish to protect certain assets. Assets like high-equity properties or expensive vehicles are not as directly at risk under an IVA compared to how they might be treated in bankruptcy proceedings.

How is an IVA considered a private agreement?

An IVA is considered a private agreement because it is a contract between a debtor and their creditors, and unlike bankruptcy, it is not publicly advertised in local newspapers. While listed on the Personal Insolvency Register, this is primarily for credit reference and not general public advertisement.

How has the public advertising of bankruptcy changed, and how does this relate to IVAs?

Since April 6, 2009, bankruptcy is no longer advertised in local newspapers, only in the London Gazette. IVAs are not advertised at all, contributing to their private nature compared to historical bankruptcy practices.

Where are debtors in an IVA or bankruptcy listed, and who primarily uses this register?

Debtors in both an IVA and bankruptcy are listed publicly on the Personal Insolvency Register. This register is mainly used by credit reference agencies to update credit records and by creditors assessing lending risk.

What is the typical duration of an income-based IVA?

An income-based IVA can often last up to five years, though the duration can be flexible and set according to the specific circumstances and the proposal agreed upon.

How can the term of an IVA be extended for homeowners?

For homeowners, an income-based IVA term can be extended by 12 months. This extension is typically in lieu of equity in a property that cannot be released directly into the IVA for the benefit of creditors.

How does the duration of income payments in bankruptcy compare to an income-based IVA?

A bankrupt is usually discharged after one year or less, and any income payments made during bankruptcy typically do not last for more than three years, often being lower than payments under an income-based IVA.

Does an IVA legally restrict a debtor from obtaining credit?

Unlike bankruptcy, an IVA does not statutorily restrict a debtor from obtaining credit. However, the IVA proposal itself may include restrictions on borrowing.

What is the legal allowance for obtaining credit in bankruptcy without disclosure?

In bankruptcy, a discharged bankrupt can legally obtain credit up to £500 without disclosing their status as a bankrupt. After discharge, there are no legal barriers to obtaining credit.

How does bankruptcy typically affect a debtor's ability to trade or act as a company director?

Bankruptcy usually leads to the dissolution of a partnership and prevents a debtor from acting as a director of a company. Self-employed individuals must also disclose their bankruptcy status when obtaining credit, such as from suppliers.

What are the implications of an IVA on a debtor's ability to trade compared to bankruptcy?

An IVA generally does not carry the same implications for trading as bankruptcy. While lenders may still inquire, there are no automatic restrictions on acting as a company director or trading as a self-employed individual solely due to an IVA.

How might creditors perceive an IVA in contrast to bankruptcy regarding a debtor's commitment?

Arguably, creditors might view an IVA more positively than bankruptcy, as it can demonstrate a debtor's commitment to repaying their debts. This perception is based on the proactive nature of proposing a repayment plan.

What is the likely impact of an IVA on a debtor's credit rating, and for how long?

An IVA is likely to have a detrimental effect on a debtor's credit rating, similar to bankruptcy. Both an IVA and bankruptcy will remain on a debtor's credit file for six years from the commencement of the arrangement or bankruptcy.

When does a debtor's credit rating typically become poor enough to consider solutions like an IVA or bankruptcy?

A debtor's credit rating is usually already poor before they begin to consider solutions like an IVA or bankruptcy. These financial difficulties often precede the formal insolvency process.

How are the fees for insolvency practitioners in an IVA structured?

There are two main fees for insolvency practitioners in an IVA: the nominee's fee for work up to the IVA agreement, and the supervisor's fee for ongoing work during the arrangement. Both are paid from the IVA contributions before dividends are distributed to creditors.

What is the nominee's fee in an IVA, and when is it paid?

The nominee's fee is charged for the work performed by the insolvency practitioner up to the point when the IVA is agreed upon. This fee is reclaimed from the payments made into the IVA before any dividends are distributed to creditors.

What is the supervisor's fee in an IVA, and how is it collected?

The supervisor's fee is an ongoing charge for the work performed by the insolvency practitioner throughout the duration of the IVA. It is reclaimed from the IVA payments at regular intervals, as agreed with the voting creditors, such as quarterly or annually.

What are disbursements in an IVA, and how are they categorized?

Disbursements in an IVA are costs incurred by the supervisor in managing the arrangement. They are split into Category 1 (costs directly related to the arrangement and payments to third parties) and Category 2 (shared or allocated costs not made to a third party).

Can creditors cap Category 1 disbursements in an IVA?

No, creditors cannot cap Category 1 disbursements. These are costs directly related to the arrangement and payments to third parties, such as bonds or search fees.

What are examples of Category 2 disbursements in an IVA?

Category 2 disbursements in an IVA include costs related to the arrangement but not paid to a third party. Examples include business mileage, printing, photocopying, and postage, allocated on a reasonable basis.

What is considered a significant advantage of an IVA over bankruptcy concerning a debtor's home?

A significant advantage of an IVA over bankruptcy is the greater control a debtor may have over their home. In bankruptcy, a trustee can force the sale of a debtor's property to realize equity, whereas an IVA can allow for exclusions or alternative arrangements.

What happens to a debtor's assets, including property equity, in bankruptcy?

In bankruptcy, a debtor's assets, including any equity in their property, generally vest in the Trustee. The trustee may then force the sale of these assets to distribute funds to creditors, although certain assets like tools of trade are excluded.

How can an IVA proposal address a debtor's home equity?

An IVA proposal can address a debtor's home equity by excluding the property altogether, proposing a re-mortgage, or suggesting longer income-based contributions in lieu of the debtor's equitable interest. This provides more flexibility than bankruptcy.

What might a supervisor register on a debtor's property in an IVA?

A supervisor may register a restriction on a debtor's property in an IVA. This ensures that the supervisor's consent is required before the property can be sold or re-mortgaged, protecting the terms of the arrangement.

What is a primary reason for an IVA to fail?

A primary reason for an IVA to fail is the individual's inability to keep up with the agreed repayments. Failure to meet these obligations can lead to the arrangement being terminated.

What happens to the debt level if an IVA fails and bankruptcy becomes a possibility?

If an IVA fails, creditors may add interest and charges to the outstanding debts from the date of the creditors' meeting to the date of failure, typically at a rate of 8% per annum. This increases the total debt owed.

Who is responsible for administering an Individual Voluntary Arrangement?

An Individual Voluntary Arrangement can only be administered by a licensed insolvency practitioner. They oversee the process from proposal to completion or failure.

What is the role of the insolvency practitioner as an adviser?

As an adviser, the insolvency practitioner (or another adviser) should inform the debtor of all available debt solutions, assess their circumstances, and recommend the most suitable option. This includes explaining IVAs, bankruptcy, debt management plans, and other alternatives.

What is the role of the insolvency practitioner when acting as a nominee for an IVA?

When an IVA is considered appropriate, the insolvency practitioner becomes the nominee. Their task is to review the debtor's proposal and report on it to the creditors, rather than drafting the proposal itself.

What common terms are included in an IVA proposal?

Common terms in an IVA proposal include an analysis of income and expenditure to determine disposable income for periodic payments, a background history of financial difficulties, details of asset realization or exclusion, and provisions for modifying the IVA if circumstances change.

How is disposable income typically handled in an IVA proposal?

Disposable income, calculated as income minus essential expenditure, is typically paid into the IVA periodically, usually monthly, over the agreed term. The proposal often states that payments will increase proportionally if disposable income rises.

What is the role of the Chairman at a creditors' meeting for an IVA?

The Chairman's role at a creditors' meeting is to hold the meeting, facilitate negotiations between the debtor and creditors, and manage the process of approving the IVA proposal.

What are common modifications requested by major banks during IVA proposal meetings?

Common modifications requested by major banks include restricting the debtor from obtaining credit, ensuring payments increase with income, specifying a minimum return to creditors (e.g., 40 pence in the pound), and insisting the IVA supervisor initiates bankruptcy proceedings if the debtor misses three or more payments.

When does the insolvency practitioner assume the role of Supervisor for an IVA?

The insolvency practitioner assumes the role of Supervisor for an IVA once the proposal has been approved by the creditors. They then manage the ongoing arrangement.

What are the key responsibilities of the Supervisor of an IVA?

The Supervisor's key responsibilities include reporting annually to creditors and the debtor, monitoring the debtor's compliance with the IVA terms, agreeing creditor claims, making payments to creditors, and ensuring the arrangement progresses as proposed.

What must a debtor do to comply with the Supervisor of an IVA?

A debtor must comply with all reasonable requests from the Supervisor, which may involve periodically providing documents such as bank statements, accounts, and wage slips to verify their financial situation.

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Understanding the IVA

A Formal Debt Solution

An Individual Voluntary Arrangement (IVA) is a formal legal procedure established in England and Wales as an alternative to bankruptcy. It provides a structured mechanism for individuals facing significant financial difficulties to propose a repayment plan to their creditors. The Scottish equivalent is a protected trust deed.

Governed by the Insolvency Act 1986, an IVA is essentially a contractual agreement between a debtor and their unsecured creditors. It allows for flexibility, accommodating various financial situations by basing the arrangement on capital, income, third-party contributions, or a combination thereof.

Purpose and Scope

IVAs were initially conceived to address debts arising from business insolvency. However, their application has expanded significantly to encompass consumer debt for individuals struggling with overwhelming personal liabilities. This makes them a viable option for those seeking legal protection and a structured repayment path, particularly for individuals who wish to retain certain assets.

Creditor Agreement

The success of an IVA hinges on the approval of its creditors. A proposal is presented through an insolvency practitioner, outlining the terms of repayment. Creditors vote on this proposal, requiring a significant majority (75% by value of those voting) for approval. If associates are among the voters, a secondary vote requires 50% approval from non-associated creditors.

The return to creditors through an IVA is often perceived as more favorable than what they might receive in bankruptcy, which can incentivize approval.

The IVA Process

Proposal and Creditor Meeting

The process begins with the debtor, often with the assistance of an insolvency practitioner (IP), formulating a proposal for creditors. This proposal details the debtor's financial situation, including income, expenditure, assets, and liabilities, and outlines the terms of the proposed repayment plan. The IP then convenes a meeting of creditors to consider and vote on the proposal.

Voting Thresholds and Approval

For an IVA proposal to be approved, at least 75% of the value of creditors who vote must agree to it. If 'associates' (business partners, friends, family) vote, a second vote is taken where 50% of non-associated creditors must also approve. This ensures a broad consensus among the majority of creditors.

Duration and Terms

Typically, an income-based IVA lasts for up to five years, though the duration can be flexible. The proposal usually includes provisions for payments to increase proportionally if the debtor's disposable income rises during the IVA term. Homeowners might have their IVA term extended by 12 months if equity in their property cannot be released.

Advantages and Disadvantages

Key Considerations

Deciding between an IVA and other debt solutions requires careful consideration of individual circumstances. Professional advice is essential to determine the most suitable path.

Advantages:

Asset Protection: Unlike bankruptcy, an IVA may allow debtors to retain significant assets, such as property equity or vehicles, depending on the proposal's terms.
Flexibility: IVAs can be tailored to individual financial situations, accommodating various income and asset structures.
No Public Advertisement: While recorded on the Insolvency Register, IVAs are not publicly advertised like bankruptcy was historically, potentially reducing perceived stigma.
Continued Trading: For self-employed individuals or directors, an IVA generally permits continued business activities without the statutory dissolution of partnerships or restrictions on directorships that bankruptcy imposes.

Disadvantages:

Credit Rating Impact: Both IVAs and bankruptcy significantly affect credit ratings, making obtaining new credit difficult during and for some time after the arrangement.
Potential for Failure: Failure to maintain payments can lead to bankruptcy, with accumulated interest and charges potentially increasing the debt burden.
Fees: Insolvency practitioners charge fees (nominee's and supervisor's) which are paid from the IVA contributions, reducing the dividend received by creditors.
Strict Compliance: Debtors must adhere strictly to the IVA terms, including potential restrictions on obtaining credit during the arrangement.

Key Roles in an IVA

The Adviser

The initial point of contact, the adviser (who may or may not be an IP) assesses the debtor's full financial situation. They present all available debt solutions, including debt management plans, Debt Relief Orders, bankruptcy, and IVAs, guiding the debtor towards the most appropriate option. While many IPs offer initial advice at no cost, other agencies may charge fees.

The Nominee

If an IVA is deemed suitable, the IP acts as the nominee. Their primary role is to review the debtor's proposal and report its viability to the creditors. The proposal itself is drafted by the debtor and their advisers, outlining income, expenditure, asset treatment, and repayment schedules. The nominee ensures the proposal meets legal requirements before submission.

The Chairman

Presiding over the creditors' meeting, the Chairman facilitates the discussion and negotiation of the IVA proposal. They manage the voting process and may negotiate modifications to the proposal with creditors and the debtor, aiming for an agreement that satisfies the majority.

The Supervisor

Once an IVA is approved, the nominee transitions to the role of supervisor. They administer the arrangement, collect payments from the debtor, distribute funds to creditors, monitor compliance with the IVA terms, and report progress annually. The supervisor ensures the IVA operates according to the agreed-upon proposal.

Fees and Disbursements

Structure of IVA Fees

IVA fees are typically paid from the debtor's contributions and do not usually increase the total amount payable. They are divided into two main categories:

Nominee's Fee: Covers the work undertaken up to the point the IVA is agreed, including proposal preparation and creditor meetings. This fee is deducted before any dividends are paid to creditors.
Supervisor's Fee: An ongoing fee for administering the IVA throughout its duration, covering tasks like monitoring compliance, managing payments, and reporting. This is usually deducted periodically (e.g., quarterly or annually).

Creditors must agree to these fees as part of the IVA proposal. Additional fees, known as disbursements (Category 1 and Category 2), may also apply for costs incurred in managing the arrangement, such as searches or administrative overheads.

Handling Property Equity

Protection and Contributions

A significant advantage of an IVA over bankruptcy is the potential control debtors retain over their property. In bankruptcy, a trustee may force the sale of a debtor's property to realize equity for creditors. An IVA proposal, however, can be structured to exclude the property entirely or, more commonly, require the debtor to contribute a portion of their property's equity over an extended period (often an additional 12 months to the IVA term).

The supervisor may register a restriction on the property's title to ensure their consent is obtained before any sale or remortgage, safeguarding the terms of the arrangement.

Consequences of Failure

When an IVA Fails

If a debtor cannot maintain the agreed IVA payments or fails to comply with its terms, the arrangement may fail. In such scenarios, bankruptcy often becomes the next step. It's important to note that a substantial portion of IVA payments are allocated to fees, meaning debtors who fail an IVA may have paid less towards their actual debt than anticipated.

Furthermore, creditors may add interest and charges (currently at 8% per annum) from the date of failure, potentially increasing the total debt owed and making subsequent bankruptcy proceedings more burdensome.

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Individual Voluntary Arrangements (IVAs)

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Understanding the IVA ℹ️

⚖️ A Formal Debt Solution

💰 Purpose and Scope

🤝 Creditor Agreement

The IVA Process ⚙️

📝 Proposal and Creditor Meeting

📊 Voting Thresholds and Approval

⏳ Duration and Terms

Advantages and Disadvantages ↔️

🤔 Key Considerations

Key Roles in an IVA 🧑‍💼

💡 The Adviser

👤 The Nominee

🗣️ The Chairman

🧐 The Supervisor

Fees and Disbursements 💰

🧾 Structure of IVA Fees

Handling Property Equity 🏠

🔑 Protection and Contributions

Consequences of Failure 💥

📉 When an IVA Fails

Teacher's Corner 🧑‍🏫

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📜 Important Notice

Dive in with Flashcard Learning!

Understanding the IVA

A Formal Debt Solution

Purpose and Scope

Creditor Agreement

The IVA Process

Proposal and Creditor Meeting

Voting Thresholds and Approval

Duration and Terms

Advantages and Disadvantages

Key Considerations

Key Roles in an IVA

The Adviser

The Nominee

The Chairman

The Supervisor

Fees and Disbursements

Structure of IVA Fees

Handling Property Equity

Protection and Contributions

Consequences of Failure

When an IVA Fails

Teacher's Corner

True or False?

Test Your Knowledge!

Gamer's Corner

Discover other topics to study!

References

Feedback & Support

Disclaimer

Important Notice