The purpose of these articles is to provide simple and straightforward answers to questions that people would like to ask about IVAs and insolvency in general but may refrain from doing so for all sorts of reasons. Let’s start by looking at a situation when somebody is planning to get married but is afraid that their fiancé may be insolvent and that their insolvent fiancé’s creditors might seize their assets. While love may be blind, it would be normal for couples to disclose to each other the state of their finances before getting married or even starting to co-habit. This is sensible because failure to disclose financial problems before starting to live together could lead to a breakdown of trust later on in the relationship when one party turns out to be insolvent and their financial difficulties come to the attention of the other solvent party.
However even when there is no disclosure before co-habitation, the solvent party can take steps to protect their assets and income and should have nothing to fear on a legal or moral basis from their insolvent partner’s creditors. The insolvent party can investigate various financial solutions without compromising the finances of their solvent partner. Such solutions may include entering into an IVA or even petitioning for bankruptcy. The solvent party may choose to support his or her partner financially in such a solution but is not obliged to do so. Both parties should seek the advice of an insolvency practitioner and obtain independent legal advice before proceeding on an insolvency solution.
People generally want to know how long an IVA will last before they commit to going down that route. The duration of an IVA really depends on the debtor’s circumstances. The four key factors are the debtor’s assets, debts, income and expenditure. Of course the attitude of creditors is crucial and this is expressed at the meeting of creditors which precedes the commencement of the IVA. In practice the debtor’s IVA proposal spells out the proposed duration and while most IVAs have a planned term of five years from the date of commencement the duration can be as short as a few months or as long as seven years. The shorter duration IVAs are often based on what is described as a ‘one-off’ proposal, where the main contribution to be made by the debtor is a lump sum. In such cases the lump sum may for example come from the proceeds of the sale of property, or from the release of equity by the remortgage of property or be monies advanced by the debtor’s spouse or by other members of the debtor’s extended family. If the debtor has regular disposable income as well as assets the IVA may well be a combination of a lump sum and monthly contributions from income and in such a case the duration could be five years or longer. However the availability of the lump sum might be dependent on the debtor’s capacity to repay the source of the lump sum (family or re-mortgage provider) from income and in some cases the disposable income would be largely committed for that purpose. If that is the case, the duration of the IVA could be relatively short.
Two other factors affect the duration of the IVA. Creditors may, at the meeting of creditors, seek an extension to the proposed duration so as to enhance the dividend or to address the potential equity which may build up in the debtor’s property over the normal five years duration of the IVA. The second factor is that the debtor’s circumstances may change for the worse during the life of the IVA and he or she can no longer afford to pay the monthly contributions which were promised in the original IVA proposal and which were agreed to at the meeting of creditors. One solution to this problem is to reduce the monthly payments and to increase the number of monthly payments to be made so as to achieve the dividend originally proposed. The mechanism to do this is for the supervisor of the IVA to call a ‘variation meeting’ of creditors to approve the reduced payments and increased duration. In general IVAs last five years with a small percentage having a much shorter duration of as little as six months and an even smaller percentage lasting six or seven years.
The cost of an IVA is a matter of concern to anybody considering going down that route, particularly since they are already encountering financial problems and can often ill-afford additional expense. If they engage the services of an IVA provider, should they make or have to make pre-IVA payments to that provider? This is a hot topic and it is a matter of concern for the OFT. The consensus among reputable firms of IVA providers is that pre-payments are not in themselves an issue provided that there is a known and agreed method whereby such pre-payments are refunded to the debtor should he or she decide to withdraw their application for an IVA or in the event that the IVA proposal is rejected at the meeting of creditors. The debtor’s natural expectation is that such a pre-payment becomes the first monthly contribution to the IVA so that, if the proposal was for sixty monthly contributions in total, there would be fifty nine further contributions to be made. This is a point on which IVA providers should be crystal clear when dealing with the debtor. Ideally, the proposal itself should disclose whether any such pre-payments have been made and the total amount paid prior to the meeting of creditors. However, creditors may in their wisdom decide that such pre-payments should be in addition to the sixty proposed payments and may modify the IVA in that regard. While the debtor may feel aggrieved, creditors take the view that the IVA clock does not start ticking until the proposal is approved at the meeting of creditors. Creditors feel that if the debtor was able to lodge monies with the nominee prior to that time, then such monies should go towards enhancing the dividend for their benefit. Here is the text of a typical modification to IVAs made by creditors at the meeting of creditors in regard to payments made to the nominee pre IVA: the balance of any payments made to the nominee or any third parties in relation to the original consultation or preparation of these proposals, less the fee agreed by the debtor, will immediately be paid into the arrangement for the benefit of unsecured creditors. Any such sums are to be paid in addition to the contributions offered in the original proposal.
Why should a debtor have confidence in the advice of an Insolvency Practitioner (IP) and what qualifications does an IP have to have? To become qualified as an IP in the UK, one needs to have a certain minimum number of hours of experience of working in an insolvency practice, currently about 600 and to have passed the Joint Insolvency Examination Board (JIEB) examinations. Most IPs would also be qualified accountants and members of a relevant recognized professional body (RPBs). An IP’s support staff would usually include qualified accountants and people with ancillary qualifications in insolvency such as the Certificate of Proficiency in Insolvency (CPI). Every firm which offers insolvency services employing such professionals and supporting debt advisors is required to have a consumer credit license. The R3 website provides details about relevant insolvency qualifications in the UK. Interestingly, there is no insolvency qualification equivalent to the JIEB in the Republic of Ireland nor is there the requirement for a debt adviser there to hold a consumer credit license. It is expected that new legislation recommended by the Law Reform Commission final report on Personal Debt Management and Debt Enforcement, which was published in December 2010, will be enacted in Ireland in the next year. It is expected to address the need for insolvency qualifications and to implement a regulatory and licensing regime similar to that currently in place in the UK.