Most articles you will examine pertaining to solutions for personal monetary problems have a tendency to pinpoint the merits, pros, benefits, upsides or whichever optimistic hype you want to place on it, of the selected remedy being explained. That's quite understandable in these recessionary days when we can do with a little bit of good news, even though it's of the 'medicine is good for you - regardless of how it tastes' kind.With that mindset we will examine an Individual Voluntary Arrangement (IVA) realistically taking on board its beneficial attributes while not overlooking the bad taste that some of its disadvantages leaves.
For anybody who proposes an IVA to their creditors, it is an occasion of great satisfaction and sometimes unbridled joy on the day of the Meeting of Creditors (MOC) when they learn that their IVA has been approved. They can now look forward to being debt free in a reasonable period of time. No more debt collectors, no more phone calls from creditors, no more bills, invoices or statements of account and no more threats of legal action. Visits from bailiffs will be a thing of the past. So what are the pitfalls of an IVA and what can go wrong?
Once the understandable personal excitement which came after the MOC has died down, the supervisor of the IVA will spell out specifically what the person in debt must do to abide by the terms and conditions of the IVA. This incorporates compliance with creditor modifications previously accepted. These modifications often call for an increase in the debtor's contributions to the IVA. The first and probably the most major pitfall may materialize in the event the debtor suffers a substantial lowering of earnings and is for that reason not able to make the contracted contributions to the IVA.
This sort of earnings decline could be on account of the borrower losing their work within just a year of the commencement of the IVA and as many as 10% of borrowers entering an IVA could be up against this issue. Other people may perhaps be facing short time employment or have to take pay-cuts. The current recession has exacerbated this difficulty with some employers pursuing 'voluntary' pay cuts from their employees. Such a reduction in salary is not the debtor's fault nor is it the fault of lenders. Nevertheless, creditors authorized the IVA and may well have changed its terms and conditions, such as seeking a minimum dividend to be paid. Defaulting on as few as two or three monthly contributions could very well be deemed as a failure to abide by the terms and conditions of the IVA. When that happens, the supervisor may send a Certificate of non-Compliance to the debtor and may call a General Meeting of Creditors to decide on the next plan of action. Although inability to make monthly contributions to the IVA is probably the most frequent matter of non-compliance there are others.
The debtor and his or her supervisor need to deal with such examples of non-compliance and this is normally done by spelling out four options for lenders at the General Meeting of Creditors. Creditors may approve one of these choices or pick an option of their own with the authorization of over 50% of voting creditors necessary to reach a decision. The four options are:
To petition for the bankruptcy of the debtor if the supervisor has been obliged to retain funds for this purpose; to terminate the IVA and distribute any available funds among the creditors; to vary the arrangement, authorizing the debtor to offer a variation of the IVA to creditors and finally to do nothing for the time being. While the last option is an unlikely outcome, it is one that might arise in certain circumstances. Creditors may alternatively decide to authorize the supervisor to allow the debtor to take a payment break for say six months, to enable monthly contributions to resume or they may decide on what other actions are to be taken.
Apart from the inability to make monthly contributions as needed, the debtor may well have to deal with several other dangers. If for instance, the debtor were to incur a new debt after the IVA was accepted without the permission of the supervisor, the new lender would not be bound by the terms and conditions of the IVA which would surely fail. The new lender could petition for the debtor's bankruptcy, if a debt in excess of 750 were to be left outstanding.
Downfalls for self-employed debtors include things like the failure to make returns to HMR&C in the accepted timescale.As this failure is self-inflicted, HMR&C often attach a modification to the proposal of a self-employed person in debt, requiring that the supervisor terminate the IVA for a non-compliance of this kind.
If the debtor fails to disclose in his or her IVA proposal, that they own a significant asset or fail to disclose post IVA approval that they have received a windfall, then the IVA will almost certainly be terminated and be deemed to have failed.
Most debtors now tackle any value which they may have in their property in their IVA proposal. Whenever they neglect to address such value, creditors will generally modify the proposal requiring them to so do. Ordinarily debtors will have to re-mortgage their property at 85% loan to value in the fourth or fifth year of their IVA and to contribute a lump sum from the released equity to their arrangement. However, it may become impossible for the debtor to make the anticipated equity contribution when it falls due. With the slump in property prices borrowers could find that their property is in negative equity and even if a little bit of equity remains in the property, they may be unable to acquire a mortgage mainly because of the recession. In such scenarios, the debtor may offer a variation proposal to lenders. This kind of variation proposal could be to extend the duration of the IVA by up to one year and to make extra monthly contributions for that time period. The aim of such additional payments would be to counterbalance the decline in the dividend as a result of the shortage of realisable equity in the property. No less than 75% of voting lenders will need to agree with such a variation proposal for it to be agreed upon.
There are many such changes of circumstances which may occur post IVA approval and which may seriously affect the debtor's capacity to fully comply with the terms of the IVA. For example, the debtor or his or her partner or a member of his or her family may contract a serious illness or suffer an injury thus reducing the household income significantly. Should such an unfortunate event occur, the debtor should inform the supervisor of the IVA as soon as possible so that all practical steps can be taken promptly to find a solution and to secure creditors' agreement to vary the IVA accordingly.
For anybody who proposes an IVA to their creditors, it is an occasion of great satisfaction and sometimes unbridled joy on the day of the Meeting of Creditors (MOC) when they learn that their IVA has been approved. They can now look forward to being debt free in a reasonable period of time. No more debt collectors, no more phone calls from creditors, no more bills, invoices or statements of account and no more threats of legal action. Visits from bailiffs will be a thing of the past. So what are the pitfalls of an IVA and what can go wrong?
Once the understandable personal excitement which came after the MOC has died down, the supervisor of the IVA will spell out specifically what the person in debt must do to abide by the terms and conditions of the IVA. This incorporates compliance with creditor modifications previously accepted. These modifications often call for an increase in the debtor's contributions to the IVA. The first and probably the most major pitfall may materialize in the event the debtor suffers a substantial lowering of earnings and is for that reason not able to make the contracted contributions to the IVA.
This sort of earnings decline could be on account of the borrower losing their work within just a year of the commencement of the IVA and as many as 10% of borrowers entering an IVA could be up against this issue. Other people may perhaps be facing short time employment or have to take pay-cuts. The current recession has exacerbated this difficulty with some employers pursuing 'voluntary' pay cuts from their employees. Such a reduction in salary is not the debtor's fault nor is it the fault of lenders. Nevertheless, creditors authorized the IVA and may well have changed its terms and conditions, such as seeking a minimum dividend to be paid. Defaulting on as few as two or three monthly contributions could very well be deemed as a failure to abide by the terms and conditions of the IVA. When that happens, the supervisor may send a Certificate of non-Compliance to the debtor and may call a General Meeting of Creditors to decide on the next plan of action. Although inability to make monthly contributions to the IVA is probably the most frequent matter of non-compliance there are others.
The debtor and his or her supervisor need to deal with such examples of non-compliance and this is normally done by spelling out four options for lenders at the General Meeting of Creditors. Creditors may approve one of these choices or pick an option of their own with the authorization of over 50% of voting creditors necessary to reach a decision. The four options are:
To petition for the bankruptcy of the debtor if the supervisor has been obliged to retain funds for this purpose; to terminate the IVA and distribute any available funds among the creditors; to vary the arrangement, authorizing the debtor to offer a variation of the IVA to creditors and finally to do nothing for the time being. While the last option is an unlikely outcome, it is one that might arise in certain circumstances. Creditors may alternatively decide to authorize the supervisor to allow the debtor to take a payment break for say six months, to enable monthly contributions to resume or they may decide on what other actions are to be taken.
Apart from the inability to make monthly contributions as needed, the debtor may well have to deal with several other dangers. If for instance, the debtor were to incur a new debt after the IVA was accepted without the permission of the supervisor, the new lender would not be bound by the terms and conditions of the IVA which would surely fail. The new lender could petition for the debtor's bankruptcy, if a debt in excess of 750 were to be left outstanding.
Downfalls for self-employed debtors include things like the failure to make returns to HMR&C in the accepted timescale.As this failure is self-inflicted, HMR&C often attach a modification to the proposal of a self-employed person in debt, requiring that the supervisor terminate the IVA for a non-compliance of this kind.
If the debtor fails to disclose in his or her IVA proposal, that they own a significant asset or fail to disclose post IVA approval that they have received a windfall, then the IVA will almost certainly be terminated and be deemed to have failed.
Most debtors now tackle any value which they may have in their property in their IVA proposal. Whenever they neglect to address such value, creditors will generally modify the proposal requiring them to so do. Ordinarily debtors will have to re-mortgage their property at 85% loan to value in the fourth or fifth year of their IVA and to contribute a lump sum from the released equity to their arrangement. However, it may become impossible for the debtor to make the anticipated equity contribution when it falls due. With the slump in property prices borrowers could find that their property is in negative equity and even if a little bit of equity remains in the property, they may be unable to acquire a mortgage mainly because of the recession. In such scenarios, the debtor may offer a variation proposal to lenders. This kind of variation proposal could be to extend the duration of the IVA by up to one year and to make extra monthly contributions for that time period. The aim of such additional payments would be to counterbalance the decline in the dividend as a result of the shortage of realisable equity in the property. No less than 75% of voting lenders will need to agree with such a variation proposal for it to be agreed upon.
There are many such changes of circumstances which may occur post IVA approval and which may seriously affect the debtor's capacity to fully comply with the terms of the IVA. For example, the debtor or his or her partner or a member of his or her family may contract a serious illness or suffer an injury thus reducing the household income significantly. Should such an unfortunate event occur, the debtor should inform the supervisor of the IVA as soon as possible so that all practical steps can be taken promptly to find a solution and to secure creditors' agreement to vary the IVA accordingly.
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