Preventing IVA Failure

Succeeding in having your IVA approved by creditors is an occasion of great satisfaction and sometimes unbridled joy on the day of the Meeting of Creditors (MOC). You can 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 are a thing of the past.

So what are the pitfalls and what can go wrong? In the euphoria following the MOC, your supervisor will spell out exactly what you must do to comply with the terms of your IVA. These terms include any modifications which creditors required and to which you have already agreed. One of the most serious pitfalls you may encounter during the term of your IVA is when you suffer a significant reduction in your income and as a consequence you are unable to make your agreed contributions to your 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 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 debtor’s fault nor is it the fault of creditors. Nevertheless, creditors approved the IVA and may have modified it to require a minimum dividend. If you the debtor fail to make two or three monthly contributions and so fail to comply with the terms of your IVA proposal as modified by creditors, your supervisor will usually issue you with a Certificate of non-Compliance 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 already 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 say six months to enable monthly contributions to resume or decide on other actions to be taken.

Apart from failure to make monthly contributions, other pitfalls may materialize:

1. If you incur a new debt after the IVA is approved without the permission of the supervisor, the new creditor is not bound by the terms of your IVA and can petition for your bankruptcy if such a debt remains unpaid and exceeds £750.
2. If you fail 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 IVA proposal, requiring the supervisor to terminate the IVA for a non-compliance of this kind.
3. Failure to disclose ownership of significant assets in your 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. If they do not do so, creditors may modify the proposal requiring them to so do. Typically a debtor will be required to re-mortgage their property at up to 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 expected equity contribution when it falls due. With the slump in property prices a debtor may find that their 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 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 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 significantly reducing the household income or increasing the household expenditure or a combination of both. 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.