Things not to do in an IVA

Pitfalls to avoid in an IVA (Individual Voluntary Arrangement)

For anybody who finds themselves to be insolvent and who then offers proposals to their creditors for an Individual Voluntary Arrangement (IVA), it’s 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 accepted by their creditors. They can now look forward to being debt free in a reasonable period of time. No more aggressive debt collectors, no more threatening or abusive phone calls from creditors, no more reminder bills, endless invoices or annoying statements of account and no more threats of legal action. Visits from bailiffs are a thing of the past.

So what are the pitfalls and what can go wrong?

In the euphoria following the MOC, the supervisor of the IVA will spell out clearly and precisely exactly what the debtor has to do to comply with the terms and conditions of the IVA, including any modifications which creditors demanded at the MOC and to which the debtor has already agreed. The most serious pitfall arises when, after the IVA has commenced, the debtor suffers a significant reduction in income and is consequently unable to make the agreed contributions to the IVA. Up to 10% of people may lose their employment within a year of entering into an IVA. Others may be faced with short time working, loss of regular overtime or have to take pay-cuts. The current recession has exacerbated this issue with some employers seeking ‘voluntary’ pay cuts from their staff. Such a reduction in income is not the employer’s fault and it is certainly not the debtor’s fault. Neither can the creditors be blamed for it. Nevertheless, creditors approved the IVA and may have modified it to require a minimum dividend to be repaid to them. If the debtor fails to make two or three monthly contributions, and as a result fails to comply with the terms and conditions of the IVA proposal as modified by creditors, the supervisor will usually issue a Certificate of non-Compliance to the debtor and will call a General Meeting of Creditors to determine the next course of action.

Failure to make contributions to the IVA is the most frequent issue of non-compliance but there are others which are briefly described below.

The supervisor will usually spell out four options for creditors at the General Meeting of Creditors and creditors may accept one of these or decide on an option of their own. Over 50% of voting creditors have to agree the decision of the meeting. The options offered by the supervisor are:

1. Petition for the bankruptcy of the debtor if the supervisor has been obliged to retain funds for this purpose.
2. Terminate the IVA and distribute any available funds among the creditors.
3. Vary the arrangement. This option would authorise the debtor to offer a variation of the IVA to creditors.
4. Do nothing for the time being. An unlikely outcome but one that might arise in certain circumstances.

Creditors may alternatively decide to allow the supervisor to afford the debtor a payment break for a limited period, say six months, to enable monthly contributions to resume or to allow time for other actions to be taken, depending on how the debtor’s circumstances change, if at all.

Other pitfalls that the debtor may encounter other pitfalls include:

1. Incurring a new debt after the IVA is approved, without the prior permission of the supervisor. The IVA will almost inevitably fail since the new creditor is not bound by its terms and conditions and can petition for the debtor’s bankruptcy if the debt is unpaid and exceeds £750.
2. Failing to make returns to HMR&C within the permitted timescale. This mainly applies to self-employed debtors. HMR&C frequently attach a modification to the debtor’s proposal, requiring the supervisor to terminate the IVA for a non-compliance of this kind.
3. Failure to disclose ownership of significant assets in his or her IVA proposal would almost certainly lead to termination.  
4. Failure to disclose a windfall received post IVA approval would be a cause of termination.
5. Most debtors now address any equity in their property in their IVA proposal or if not, creditors may modify the proposal requiring them to so do. Typically a debtor will be required 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 payment from the released equity funds to their IVA. However, it may become impossible for the debtor to make the expected equity contribution when it falls due. With the slump in property prices a debtor may find that his property is in negative equity. Furthermore, even if some equity remains in the property, the debtor may be unable to procure a mortgage due to the credit crunch. In such circumstances, the debtor may offer a variation proposal to creditors. Such a proposal might be to extend the duration of the IVA by up to one year and to make additional monthly contributions for that period. The purpose of such additional payments would be to offset the anticipated reduction in the dividend due to the lack of realisable equity in the property. At least 75% of voting creditors must agree to such a variation in order for it to be approved.

There are many such changes in the debtor’s circumstances which may occur post IVA approval and which may seriously affect the debtor’s capacity to fully comply with the terms and conditions 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 resulting in a significant reduction in the household income. Should such an unfortunate event occur, the debtor should inform the supervisor 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.