IVA's are governed by Part VIII (sections 252-263) of the Insolvency Act 1986 and are a formal individual insolvency procedure. As such, IVA’s can be alternative to an individual entering bankruptcy.
An IVA is an agreement between a debtor and their unsecured creditors and allows a debtor to either settle their outstanding debts by paying an agreed proportion of them to their creditors or for an arrangement with the creditors concerning the payment of their debts and can be through the debtor’s assets being held or controlled in a trust with the creditors as the beneficiaries.
Where an IVA is in place, it is usually supervised by an authorised professional who will monitor the implementation and compliance with the terms of the IVA by the debtor.
An IVA can last for any length of time but the usual period is for three to five years. If at the end of the term of the IVA the debtor’s payments have been insufficient to pay off all of the IVA debts in full, the shortfall is usually written off by the creditors.
IVA’s are flexible as they can be tailored to the debtor’s circumstances and can require that the debtor makes funds available out of their assets (asset-based IVA), income (income based IVA) or a mixture of both. Further to this, IVA’s allow third party’s to contribute to the funds available for the creditors. In bankruptcy, a third party cannot contribute funds to assist the debtor.
Another point of note is that if approved by creditors holding 75% or more of the debt, an IVA will bind the debtor and all of their creditors to accept the terms of the IVA in settlement of their debts. The rights of secured creditors such as mortgagees cannot be affected without their consent and usually remain outside of the IVA.
Who can propose an IVA?
An IVA can be proposed by a debtor, a debtor’s Trustee in Bankruptcy. The debtor themselves may be a consumer, sole trader or a partner in a partnership that is experiencing financial difficulties. The debtor will usually prepare an IVA proposal based on the amount of debt that they propose that they can realistically pay. The proposals are submitted to the Court together with a report by the nominee. It can be possible to obtain an order that will prevent creditors from taking action against a debtor pending consideration of their proposal by the creditors.
Debts that can be included in an IVA:
IVA’s can include most unsecured consumer debts such as bank loans, overdrafts, credit cards, personal loans, store cards, tax bills including council and income tax arrears or any other tax debt and utility bills such as gas, electricity, television, etc.
It should be noted that the following debts cannot be included in an IVA:
- Maintenance arrears that have been ordered by a Court;
- Child support arrears;
- Magistrates Court fines;
- Student loan repayments; and
- Arrears of mortgage debt, secured loans or rent (without the consent of the creditor concerned).
It is therefore essential that the debtor will have sufficient funds to pay the debts outside of the IVA as well as the instalments required under the IVA.
Completing an IVA
The individual terms of the IVA will determine when the debtor will complete their IVA. The common terms under IVA provide for it to end upon either:
- The termination of the IVA by the supervisor. This is usually following the debtor breaching the terms of the IVA but it can also be because of the debtor having died or being made bankrupt; or
- The completion of the IVA in accordance with its terms.
The proposal will specify a term for the IVA during which the debtor will make their contributions or lump sum payment to the supervisor. The monies received are then distributed to the creditors by way of a dividend after the payment of the supervisor’s remuneration and expenses.
On the completion of the IVA and the payment of the final dividend to the creditors, the agreement entered into between the debtor and the creditors is fully performed and concludes.
Advantages of an IVA
There are advantages with IVA’s for both the debtor and the creditor’s, which are summarised below.
For the Creditor’s:
- The costs of administering an IVA compared to than that of a bankruptcy estate are significantly lower;
- There is a potentially higher return as a dividend; and
- Tax and VAT bad debt relief may still be claimed.
For the Debtor:
- IVA’s are an effective alternative to bankruptcy proceedings;
- They provide protection against impatient creditors and can bind all creditors;
- Can enable a sole trader or partnership to continue trading to generate income to pay the creditors;
- Flexible proposals can be put forward by the debtor that relate to their personal circumstances; and
- Avoids the stigma, restrictions and effects of bankruptcy (please see our related article on Bankruptcy for details upon the restrictions and effects of bankruptcy).
Disadvantages of an IVA:
As well as having advantages, there are disadvantages with IVA’s for both the creditor’s and the debtor.
For the Creditor’s:
- It can take a debtor a number of years to pay off the debt and so may not be appropriate for a creditor who requires payment quickly;
- A creditor can be bound by the terms of an IVA that they are not in agreement with if the other creditor’s with 75% or more of the debt agree to those terms; and
- After the term of an IVA ends, a creditor may still have to write off a further proportion of the debt as the shortfall if the debtor’s payments have insufficient throughout the term.
For the Debtor:
- An IVA is public information as it is entered on the Individual Insolvency Register;
- Where contributions are made by a debtor from income, an IVA is generally expected to last for a much longer period than bankruptcy;
If the debtor’s circumstances change during the term of the IVA and the creditors reject the amended terms, the IVA is likely to fail. In this situation the debtor will still owe the creditors the full amount of what they owed at the start of the IVA, less whatever amount has been paid to the creditors under the IVA;
An IVA can be expensive and the risks of entering into one should be carefully considered by the debtor before doing so;
If the debtor fails to comply with the terms of the IVA, their home and personal assets may be at risk. The debtor can be made bankrupt upon an IVA failure by virtue of a petition presented by either the supervisor or a creditor; and
The debtor’s credit rating can be detrimentally affected for a period of up to seven years.
How we can help
T G Baynes have an experienced debt recovery department and civil litigation department that have dealt with a number of cases that have concerned IVA’s. As a result of this, T G Baynes is able to advise you appropriately regarding IVA’s as well as alert you to any of the risks and problems you may face.
If you are a debtor with an IVA or are a creditor with a debtor in an IVA, please do not hesitate to contact us.