IVA

An IVA is a real alternative to bankruptcy for many people. Some professional people e.g. those working within the financial services market or a company director can still continue with their profession when bankruptcy is likely to prevent this (Although with bankruptcy you can apply to the court for permission to carry on your professional work and this maybe granted).

An IVA allows you to write off up to 75% of your debts (unsecured debts only). There are companies out there that claim to be able to write off 85%, 90% and sometimes 95%. From my research there would have to be some very good reason for your creditors to accept this e.g. you have extremely poor health or you may be able to convince your creditors to accept less if you can make a single lump sum payment (Sometimes relatives are able to provide this). Most of the time though, an absolute maximum that will be considered by your creditors is that 75% of your debts are written off. Your creditors would then receive 25p for every £1 that you owe them. However, like everything in life you do not get something for nothing. You have to use an Insolvency Practitioner, the cheapest we have found will cost you £4,000 and some charge considerably more.

Some Insolvency Practitioners require their fees up front but the majority of them will allow you to pay their fees monthly. An IVA is generally only suitable if you have debts of at least £15,000 and you owe those debts to at least 3 creditors. The Insolvency Practitioner will prepare a proposal to your creditors based on what you can reasonably afford. If you are not able to offer your creditors a lump sum payment for your debts then an alternative is to have a 36/60 month payment IVA. An IVA usually lasts 3 years (36 months) to 5 years (60 months). So in 60 months you should be able to afford to pay back at the very least 25% of what you owe all of your creditors and your Insolvency Practitioner fees. Creditors are not generally interested in having this drag on for longer than 5 years.

You should also consider that some creditors would reject a proposal where they only receive a return of 25p in the £1, i.e. a 75% IVA. Some banks require 35p as a minimum . Therefore, as to whether an IVA is feasible depends on your current monthly income and available disposable income to pay for your IVA but it also depends on who your creditors are and whether a proposal is accepted. In order for an IVA to be accepted then 75% of your creditors by value, must vote in favour of it. A very simple example might be that you have 5 creditors that you owe £1,000 to and one creditor that you owe £15,000 to (Total £20,000 between 6 creditors). If the five that you owe £1,000 to reject the proposal but the one that you owe £15,000 to accepts it, then an IVA will be granted. This is because the £15,000 creditor holds 75% of the vote. The remaining five debtors will have to then accept your offer under an IVA by law.

So to consider how much you are likely to need to be able to afford each month as an absolute minimum you should consider these examples:

Example 1: You owe £25,000. £25,000/4 (write off 75%)+£5,000 (Insolvency Practitioner fees)/60 (number of months to pay your IVA over).

So you have £25,000 worth of debts. You write off 75% and this leaves you with £6,250. You then add £5,000 as an Insolvency Practitioner fees (estimate) and this totals £11,250 to pay back over 5 years. Then divide this by 60 months and you have £187.50. Therefore, you and your Insolvency Practitioner should be convinced that you are able to afford at least £187.50 per month to have any reasonable chance of an IVA being accepted.

Example 2: You owe £100,000. £100,000/4+£5,000/60 = £500 per month. You must be able to afford as a very minimum £500 per month to apply for an IVA with this level of debt.

It should be noted that there are many factors that can influence an Insolvency Practitioners fees and therefore £5,000 is just an example. It should also be noted that the above examples only work if 75% of your creditors by value of debt, vote to accept this offer.

Therefore, it is not as straight forward an option as this first looks. It may help to look for an Insolvency Practitioner that is very experienced in this and be careful with any Insolvency Practitioner that wants to charge you up front fees. Certainly you do not want an IVA to fail and if your Insolvency Practitioner had any confidence in a successful outcome of your IVA it would not be necessary for them to charge you an up front fee. The last thing you want is to pay more money and find out that your IVA has failed and you now in fact have even less money to repay to your creditors.

The steps of an IVA are fairly straightforward:

Firstly, an Interim Order is applied to at the court to stop any creditor action. This is not always necessary but sometimes it is. This order stops your creditors from pursuing the debt in court until the outcome of the IVA is determined. If an IVA is granted, then the lending company must treat what you pay your Insolvency Practitioner as full and final settlement of your debt. If your IVA fails then your creditor can continue to pursue legal action against you but later in this chapter, we will discuss ways that you can try to avoid legal action.

Secondly, your Insolvency Practitioner will prepare a proposal; this will include a statement of your affairs. This is then submitted to the court. The proposal must also include details of how your debts got to be this size and also your monthly budget and other supporting information such as payslips proving current income. The Insolvency Practitioner must also state that he/she is convinced that this solution is in your best interest and is affordable for you.

Thirdly, your Insolvency Practitioner will call a creditors meeting. This might be an actual meeting or it might be just a postal vote. Your creditors will at this stage vote to accept or reject your proposal.

Finally, if 75% of your creditors by debt value vote to accept your proposal you will have your IVA.

The advantages of an IVA is that you will avoid bankruptcy and you can still keep your home if you own one and keep your reputation and continue your work if you are a professional. Your name will be entered in the Insolvency Register but unlike going bankruptcy, it will not be published in any newspapers. Once you have finishing paying for your IVA, your name will be removed from the register and all of your debts will be seen to be satisfied. Of course, for the term of an IVA this information will still be on your credit file and it will make it difficult to obtain any further credit.

Next Topic: Debt Consolidation Loans