Many people who entered into Individual Voluntary Arrangements (IVAs) three or four years ago may be worried that their IVAs may fail because of the sharp fall in property values in the meantime. In many cases the IVA proposal, while being largely based on monthly contributions from income, also offered to re-mortgage the debtor’s property in the fourth or fifth year of the arrangement and to contribute a lump sum to the IVA from the equity released by the re-mortgage.
The monthly contributions and the anticipated equity lump sum taken together would provide creditors with the dividend offered in the proposal.
In some cases where no equity was offered in the original IVA proposal, creditors added modifications requiring the debtor to re-mortgage the property in the fourth or fifth year and to contribute a portion of the released equity to the IVA so as to enhance the dividend. In some cases creditors required a stated minimum dividend to be so achieved.
With the fall in property prices a number of different scenarios may arise:
- Negative equity or no equity in the property.
- Minimal equity in the property.
- Modest equity in the property but debtor unable to re-mortgage due to the credit crunch, a poor credit rating, a limit on the loan to value (LTV) which mortgage providers are willing to offer or a combination of these factors.
- Substantial equity in the property but high street lenders unwilling to offer a re-mortgage due to debtor’s credit history or other reasons. Only ‘non high street’ or ‘sub-prime’ lenders willing to lend but re-mortgage would be subject to exorbitant interest rates – sometimes described as adverse lending.
If no equity lump sum can be realized, the dividend in the IVA is likely to fall short of that offered in the proposal or of the minimum dividend required by creditor modifications. To address this issue, the debtor can consider offering a variation proposal to creditors. Such a variation can simply request the removal of the ‘equity’ modification, enabling the debtor to successfully complete the IVA without making any equity contribution. In such a case, creditors would receive a dividend similar to that originally proposed but probably less than that sought by the creditor modification. Alternatively, the debtor may offer a variation proposal offering to extend the term of the proposal for up to one additional year and to make additional monthly income based contributions in lieu of any equity in the property. While extending the arrangement by up to one year may not be welcome for the debtor, it can be greatly preferable to re-mortgaging at adverse rates, something which is likely to have long term negative consequences for the debtor. Creditors of course retain the right to modify any variation proposals put forward by the debtor but extending the term to address equity is often acceptable to them.
The insolvency practitioner (IP) supervising the IVA will advise the debtor on the options open regarding addressing equity. Such an IVA need not fail and creditors are generally sympathetic to debtors who are genuinely attempting to address their financial affairs in the current recession.