It’s a big anxiety for those who are thinking of entering into an IVA as to how that process might have an impact on their mortgage. Are they going to lose their house? If they are married or simply co-habiting then they need to make sure that whatever crops up on account of their entering into the IVA isn’t going to impact negatively on their spouse or partner. Let’s look at the impact of an IVA on the mortgage of a single individual to begin with.
The IVA offer has to incorporate the debtor’s statement of affairs which truly discloses all of the debtor’s assets and liabilities and it also mustcarry a statementin regards to the debtor’s income and his or her living expenditures. The I&E declaration, as it’s called, typically illustrates the average one month period. Expenditures which come up annually are shared out over the twelve months on a notional basis. Consider car insurance, for instance. If the motor insurance cost is paid once annually, then the monthly I&E statementhas a figure equivalent to one twelfth of the yearly premium.
A property such as a house is an asset and if you have a mortgage on it you also have a liability. The asset might have equity in it if its up-to-date realisable value is higher thanthe amount of moneyrequired to redeem (or settle the balance of) your mortgage, which includes any pertinent early redemption penalties. The monthly mortgage payment is frequently the largest individual item of expenditure on anybody’s I&E declaration. So in the first instance, you will need todisclose a lot of information to your lenders regarding your assets, which includes your property, in your IVA offer. The single person offering an IVA to lenders should not be unduly anxious about the impact of the IVA on their mortgage. Lenders will usually let the insolvent individual to continue to pay the mortgage throughout the time period of the IVA, provided that the amount of 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 debtor’s net income, then lenders might consider that to be excessive and might ask the question as to why the debtor shouldn’t dispose of the property and live instead in rented accommodation. Gains for lenders could come through the release of equity from the selling of the property if a significant part of those funds were to be contributed to the IVA as well as the savings made from renting accommodationas opposed topaying a mortgage.
Generally speaking however, lenders usually do not require that a mortgaged property be sold. Instead they frequently look for the borrower to realize any equity in the property and to contributea substantialportion of the equity funds realized into the IVA in the final year of the IVA duration, usually the fourth or fifth year. Then, the borrower would be expected to remortgage or sell the property to liquidate any value therein. In reality the recession has made these means of releasing equity very difficult. The person in debt might not be in a position to get a remortgage due to her or his inferior credit history due to needing to enter an IVA to begin with. If a remortgage can be obtained, the monthly mortgage payments would be likely to be at penal interest rates and so be unmanageable for the person in debt. If selling the property is the only means of realizing any equity therein, lenders are usually unwilling to pursue this course of action unless the amount of equity is going to be sizeable. In a buyer’s market, that is unlikely to be the case.
What then about a married or co-habiting couple? Being wedded or co-habiting usually signifies that most normal facets of lifestyle are shared by partners. Utilities like water and electricity are consumed in varying amounts by co-habiting persons and travel costs may vary greatly between the partners. Thus for each item of expenditure, the partners might sustain widely different living expenses, regardless of the amount of each partner’s earnings. Looking at earnings however, it is relatively simple to calculate the relative percentages of the household income that each partner earns. The evidence of earnings is based on pay-slips, P60’s, tax credits awards and so on. The usual treatment of normal living expenses is for each partner to cover these kinds of expenses in the same proportion as their earnings. For instance, if partner A brings in two thirds of the total household income, then that partner is liable for paying two thirds of the living costs.
The ownership of assets depends on many issues. Each asset like a car or a house can be entirely or partially owned by either partner. Certain assets can 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 house from day one.
Each partner is personally liable for his or her own debts and both partners are responsible for jointly incurred debts. One particular partner may have a large amount of debts and the other have very few and there might be a few or no joint liabilities. Thus, one partner can be insolvent and the other not. If the insolvent partner decides to go into an IVA, it will most likely have some effects on the solvent partner. The first effect is that the household income and expenditure must be disclosed to the lenders of the insolvent partner. Creditors will require a statement of income and expenditure for the household demonstrating how living expenditures are attended to and paid for.
In regard to assets such as a house, lenders will expect to discover who owns what and in what relative amount. 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 advantage. The insolvent partner might have to re-mortgage or sell the property and could not do so without the consent and agreement of the solvent partner.
An important consideration in all of these matters is whether the partners have agreed to share their resources when they started to cohabit or indeed at some point thereafter. Even without a formal arrangement, it may be implied from the facts 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 donating some or all of their own excess income to the IVA.
Finally, the insolvent partner’s IVA may impact on the other partner’s credit score. The IVA should have attended to any joint debts, with lenders receiving a dividend from the IVA. However, the solvent partner has to maintain the full contractual repayments on any joint liabilities through the entire life of the IVA and will have to repay any balance still left on the joint account after the IVA is concluded. Of course, any dividend paid from the IVA would cut short the duration of the remaining term of such debts. During the life of the IVA the solvent partner might also need to handle the reluctance of creditors to lend funds, being aware of of the insolvent partner’s IVA.
Nevertheless, many people have successfully concluded their IVAs without detrimentally affecting their solvent partner. A well constructed IVA will address all matters relating to income and expenditure as well as assets and liabilities and permit both partners to grasp the opportunity to wholly and finally alleviate their financial woes.