The pitfalls of an IVA

Euphoria following acceptance

For anybody who proposes an Individual Voluntary Arrangement (IVA) to their creditors, it’s an occasion of great satisfaction and sometimes unbridled joy when the day of the Meeting of Creditors (MOC) comes round and they learn that their IVA has been approved by creditors. They can now look forward to being debt free in a reasonable period of time. No more debt collectors, no more threatening or harassing 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.

Main Pitfalls

So what are the pitfalls and what can go wrong? Following the (usual) euphoria after the MOC, the supervisor of the IVA will spell out exactly what the debtor must do to comply with the terms of the IVA, including any modifications which creditors require and to which the debtor has already agreed.

The most serious pitfall that can arise is when the debtor suffers a significant reduction in income and is consequently unable to make the agreed contributions to the IVA. Perhaps as many as 10% or more of people 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 staff. Such a reduction in income is not the debtor’s fault no more than it is the fault of creditors. Nevertheless, creditors approved the IVA and may have modified it to require a minimum dividend. If the debtor fails to make two or three monthly contributions and so fails to comply with the terms of the IVA proposal as modified by creditors, then the supervisor will usually issue a Certificate of non-Compliance to the debtor 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.

Options for Creditors

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 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 creditors 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.

Other Pitfalls

Apart from failure to make contributions, the debtor may encounter other pitfalls. These include:

1. Incurring a new debt after the IVA is approved without the permission of the supervisor. The new creditor is not bound by the terms of the IVA which inevitably fails and can petition for the debtor’s bankruptcy if such a debt is unpaid and exceeds £750.
2. Failing to make returns to HMR&C within the permitted timescale. This mainly applies to self-employed debtors. HMR&C will frequently have attached a modification to the debtor’s proposal, requiring the supervisor to terminate the IVA for a non-compliance of this kind.
3. Failure to disclose ownership of significant assets in his or her 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 or if not, creditors may modify the proposal requiring them to so do. Typically a debtor will be required to re-mortgage their property at 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 his 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.

Keeping the Supervisor Informed

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 reducing household income significantly. 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.