It can be a worry for anybody who is thinking of entering an IVA as to how the process will affect their mortgage with the biggest fear being of losing their house. If they are married or simply co-habiting then they want to make sure that anything that happens as a result of their going into the IVA does not impact negatively on their spouse or partner or indeed on themselves and their children. Let’s look at the effects of an IVA on the mortgage of a single person first.
The IVA proposal must contain the debtor’s statement of affairs. That fully discloses all the debtor’s assets and liabilities. It must also provide a statement regarding the debtor’s income and living expenses. That statement usually illustrates a typical one month period. Expenses that occur once a year are split out over the twelve months on a notional basis. Take car insurance, for example. If the car insurance premium is paid once annually, then the monthly I&E statement will show a figure equal to one twelfth of the annual premium.
A property such as a house is an asset and if you have a mortgage on it you also have a liability. The property may have equity in it if its current realisable value exceeds the amount required to pay off the balance owing on the mortgage, including any early redemption penalty that might apply. The monthly mortgage payment is often the largest single monthly item of expenditure. Clearly then, you must disclose a lot of information to your creditors about your assets, including your house, in your IVA proposal.
The single person offering an IVA to creditors should not be unduly concerned about the effect of the IVA on their mortgage. Creditors will usually allow the insolvent person to continue paying the mortgage right through the term of the IVA, provided that the monthly mortgage payment is not an excessive percentage of the debtor’s net income. If the monthly mortgage payment is of the order of 40% or more of the person’s net income, then creditors might consider that to be excessive. They might suggest that the debtor dispose of the property and live instead in rented accommodation. Gains for creditors could come through the release of equity from the sale of the property if a substantial part of those funds were to be contributed to the IVA as well as the savings made from renting accommodation rather than paying a mortgage.
Usually however, creditors will not require the debtor to sell a mortgaged residential property. Instead they often look for the debtor to realize any equity in the property and to contribute a substantial percentage of any equity funds realized in the final year of the IVA term, usually the fourth or fifth year. At that time, the debtor would be expected to remortgage or sell the property to liquidate any equity therein. In reality the recession has made these means of releasing equity very difficult. Even if there is some equity in the property, the debtor may not be able to obtain a remortgage because of a poor credit history due to having to enter an IVA in the first place. If a remortgage could be obtained, the monthly mortgage payments would be likely to be at penal interest rates and so be unaffordable for the debtor. If selling the property is the only means of realizing any equity therein, creditors are usually reluctant to pursue this course unless the amount of equity is likely to be substantial. In a the current buyer’s market, that is unlikely to be the case.
What then about a married or co-habiting couple? Being married or co-habiting usually means that most ordinary aspects of life are shared by partners. Utilities such as water and electricity are consumed in varying amounts by co-habiting partners and transport costs may vary hugely between the partners. Thus for each item of expenditure, the partners might incur widely varying living expenses, regardless of the level of each partner’s income. Looking at income however, it is relatively easy to calculate the relative percentages of the household income that each partner earns. The evidence of income is supported by pay-slips, P60’s, tax credits awards and so on. The usual treatment of ordinary living expenses is for each partner to pay such expenses in the same ratio as their income. For example, if partner A earns two thirds of the total household income, then that partner is considered by creditors to be responsible for paying two thirds of the joint living expenses.
The ownership of assets depends on many matters. Each asset such as a car or a house may be wholly or partly owned by either partner. Some assets may be owned on a 50/50 basis or on an entirely different basis. For example, if partner A owned a dwelling house outright and partner B moved in to cohabit, then it would be manifestly incorrect to assert that they each owned 50% of that property from day one.
Each partner is personally liable for his or her debts and both partners are liable for jointly incurred debts. One partner may have a lot of debts and the other have very few and there may be some or no joint debts. Accordingly, one partner may be insolvent and the other not. Should the insolvent partner decide to enter into an IVA, it will almost certainly have some effect on the solvent partner. The first effect is that the household income and expenditure has to be disclosed to the creditors of the insolvent partner. Creditors will require a statement of income and expenditure for the household showing how living expenses are incurred and paid for.
In regard to assets such as a house, creditors will expect to see who owns what and in what ratio. This is particularly important if there is equity in a jointly owned property. Creditors would expect the insolvent partner to address his or her share of the equity for their benefit. Even if the insolvent partner is required to re-mortgage or sell the property they could not do so without the consent and agreement of the solvent partner.
A key consideration in all of these matters is whether the partners have agreed to pool their resources when they began to cohabit or indeed at some point thereafter. Even without a formal agreement, it may be implied from the evidence of their lifestyle and expenditure that they have so done. It may be that the solvent partner voluntarily agrees to assist the insolvent partner who is proposing the IVA by contributing some or all of their own surplus income to the IVA.
Finally, the insolvent partner’s IVA may impact on the other partner’s credit worthiness. The IVA will have addressed any joint debts, with creditors receiving a dividend from the IVA. However, the solvent partner has to maintain the full contractual repayments on any joint debts during the life of the IVA although any dividend paid from the IVA would shorten the length of the term of such debts. During the life of the IVA the solvent partner might also have to deal with the reluctance of creditors to lend funds, knowing of the insolvent partner’s IVA.
Nevertheless, many people have successfully completed their IVA without negatively affecting their solvent partner. A well constructed IVA will deal with all matters relating to income and expenditure as well as assets and liabilities and enable both partners the opportunity to fully and finally heal their financial woes.