Individual Voluntary Arrangement
Encyclopedia
In the UK, an Individual Voluntary Arrangement (IVA) is a formal alternative for individuals wishing to avoid bankruptcy
.
The IVA was established by and is governed by Part VIII of the Insolvency Act 1986
and constitutes a formal repayment proposal presented to a debtor's creditors via an Insolvency Practitioner
. Usually (but not necessarily) the IVA comprises only the claims of unsecured creditors, leaving the rights of secured creditors largely unchanged.
An IVA is a contractual arrangement with creditors and can be as flexible as an individual's own circumstances; they can therefore be based on capital, income, third party payments or a combination of these.
In this process, a debtor who has enough money left over after priority creditors and essential expenses, may be able to arrange an individual voluntary arrangement. (After taking independent advice, debtors with less serious problems may wish to consider a debt management plan).
The analogous procedure for businesses is the Company Voluntary Arrangement.
IVA's were originally designed to provide relief to debts generated as a result of business insolvency
. In recent years, increasing levels of consumer debt has led to many insolvent individuals with non-business generated debts seeking the legal protection offered within an IVA. IVAs may be popular with people who have large amounts of assets which they wish to protect. These assets, such as high equity properties and expensive cars etc., are not directly at risk under an IVA – as they may be in a bankruptcy.
In the UK, an increasing number of consumer debtors with overwhelming levels of debt are turning to specialist debt advice organisations that offer an alternative to bankruptcy via the use of an IVA.
, however they are not mutually exclusive. A person can propose an IVA after they have been made bankrupt. If an arrangement is approved post-bankruptcy then the debtor can apply to the Court for an annulment of the bankruptcy order - such IVAs can only be proposed whilst the bankrupt is undischarged. If an IVA is proposed after a bankruptcy order has been made, it is now also possible to nominate the Official Receiver
to be the supervisor of the arrangement. The Arrangements offered by the Official Receiver are very restricted and have not proved very popular. This type of arrangement is called a Fast Track Voluntary Arrangement
and is only suitable in certain cases.
(PTD). The Trust Deed, although similar to the Individual Voluntary Arrangement in many ways, lasts only for three years as opposed to the five year period that constitutes the vast majority of IVAs. Trust Deeds are an alternative to bankruptcy in Scotland which is referred to as Sequestration
.
. Both debtors in an IVA and bankrupts are listed publicly on the Personal Insolvency Register, and will be recorded by credit reference agencies.
The Nominee's Fee is a fee charged in relation to the work performed up to the point when the IVA is agreed. It is reclaimed from payments into the IVA before any dividend is paid to creditors.
The Supervisor's Fee is an ongoing fee in relation to the work performed during an IVA. It is reclaimed from payments into the IVA at regular intervals, as agreed with voting creditors. This could be quarterly or annually depending on the rules stipulated in the individual's proposal.
Some Debt Management Companies try to include an extra IVA arrangement fee.
, ordinary household contents). This will usually include equity in their property and the Trustee may force its sale. An IVA proposal may exclude the property altogether, or propose a re-mortgage or offer income based contributions for a longer period in lieu of the debtor's equitable interest in the property. The Supervisor may register a restriction on the property to ensure that his or her consent is required before the property is, for example, sold or re-mortgaged.
Additionally, creditors will also add on interest and charges to the debts from the Meeting of Creditors date to the date of failure (currently 8% per annum), thereby increasing the level of debt.
, and IVA. The adviser should look at all the debtor's circumstances, what they own, what they owe, and their household income & expenditure to advise the best solution. The adviser can charge for debt advice or offer it within a charity capacity where they will not pay for the debt advice. Charitable debt advice agencies include Citizens Advice Bureau
, CCCS, Christians Against Poverty
& Debt Support Trust
.
It is instead the Nominee's task to review the proposal on which he has been asked to act, and to report on it.
In practice, the proposal is generally a standard document which is modified to the each debtor's particular circumstance. Common terms will include:
An analysis of the debtor's income (A) and expenditure (B). From this, the debtor's disposable income is calculated (A)-(B) and this will become the amount that will be paid into the IVA periodically (usually monthly). The period is usually five years, but can be any length. The proposal will usually state that if the disposable income increases during the term of the IVA, the amount to be paid will also increase proportionately.
A background history explaining how the debtor's financial difficulties arose.
Details of any assets that are to be realised or excluded. For example, how the matrimonial home will be dealt with, pension schemes, share save schemes, vehicles, etc.
The ability to call future meetings of creditors in the event that circumstances change, to modify the terms of the IVA.
Restrictions on obtaining credit. This is because a debt incurred after the approval of the IVA could result in a bankruptcy petition from a creditor, which would almost certainly cause the IVA to fail.
Bankruptcy
Bankruptcy is a legal status of an insolvent person or an organisation, that is, one that cannot repay the debts owed to creditors. In most jurisdictions bankruptcy is imposed by a court order, often initiated by the debtor....
.
The IVA was established by and is governed by Part VIII of the Insolvency Act 1986
Insolvency Act 1986
The Insolvency Act 1986 is an Act of the Parliament of the United Kingdom that provides the legal platform for all matters relating to personal and corporate insolvency in the UK.-History:...
and constitutes a formal repayment proposal presented to a debtor's creditors via an Insolvency Practitioner
Insolvency practitioner
In the United Kingdom, only an authorised or licensed Insolvency Practitioner may be appointed in relation to formal insolvency procedures.Quite often IPs have an accountancy background...
. Usually (but not necessarily) the IVA comprises only the claims of unsecured creditors, leaving the rights of secured creditors largely unchanged.
An IVA is a contractual arrangement with creditors and can be as flexible as an individual's own circumstances; they can therefore be based on capital, income, third party payments or a combination of these.
In this process, a debtor who has enough money left over after priority creditors and essential expenses, may be able to arrange an individual voluntary arrangement. (After taking independent advice, debtors with less serious problems may wish to consider a debt management plan).
The analogous procedure for businesses is the Company Voluntary Arrangement.
Process
Creditors take a decision at a creditors' meeting called to consider the IVA proposal. The return to creditors is often higher than they would receive in bankruptcy. A vote is taken - by value. 75% in value of those creditors who vote at the meeting by person or by proxy must agree in order for the arrangement to be approved. If any of those voting are 'associates' (usually business associates, friends and family) then a second count is taken and 50% of non-associated creditors must approve it.IVA's were originally designed to provide relief to debts generated as a result of business insolvency
Sole Trader Insolvency
According to the Office for National Statistics, sole proprietors represented 23.8% of all UK enterprise in 2010. Of that number, more than half a million sole traders were operating via the PAYE or VAT system alone. Sole traders are a distinct legal entity, operating as one type of UK business...
. In recent years, increasing levels of consumer debt has led to many insolvent individuals with non-business generated debts seeking the legal protection offered within an IVA. IVAs may be popular with people who have large amounts of assets which they wish to protect. These assets, such as high equity properties and expensive cars etc., are not directly at risk under an IVA – as they may be in a bankruptcy.
In the UK, an increasing number of consumer debtors with overwhelming levels of debt are turning to specialist debt advice organisations that offer an alternative to bankruptcy via the use of an IVA.
IVA and/or Bankruptcy
An IVA is an alternative to bankruptcyBankruptcy
Bankruptcy is a legal status of an insolvent person or an organisation, that is, one that cannot repay the debts owed to creditors. In most jurisdictions bankruptcy is imposed by a court order, often initiated by the debtor....
, however they are not mutually exclusive. A person can propose an IVA after they have been made bankrupt. If an arrangement is approved post-bankruptcy then the debtor can apply to the Court for an annulment of the bankruptcy order - such IVAs can only be proposed whilst the bankrupt is undischarged. If an IVA is proposed after a bankruptcy order has been made, it is now also possible to nominate the Official Receiver
Official Receiver
An officer of the Insolvency Service of the United Kingdom, the Official Receiver is an officer of the court to which he is attached. The OR is therefore answerable to the courts for carrying out the courts' orders and for fulfilling his duties under law...
to be the supervisor of the arrangement. The Arrangements offered by the Official Receiver are very restricted and have not proved very popular. This type of arrangement is called a Fast Track Voluntary Arrangement
Fast Track Voluntary Arrangement
When an individual been made bankrupt in the UK it's legal and advisable to have a make use of an IVA referred to as a "fast-track individual voluntary arrangement" which implies the bankruptcy order can be annulled if all the terms have been fulfilled...
and is only suitable in certain cases.
Scotland
In Scotland there is a similar procedure to the Individual Voluntary Arrangement called a Protected Trust DeedProtected Trust Deed
A trust deed is a voluntary but formal arrangement that is used by Scottish residents where a debtor grants a ‘trust deed’ in favour of the trustee which transfers their estate to the trustee for the benefit of creditors. It can be a way for people to deal with debt problems...
(PTD). The Trust Deed, although similar to the Individual Voluntary Arrangement in many ways, lasts only for three years as opposed to the five year period that constitutes the vast majority of IVAs. Trust Deeds are an alternative to bankruptcy in Scotland which is referred to as Sequestration
Sequestration (law)
Sequestration is the act of removing, separating, or seizing anything from the possession of its owner under process of law for the benefit of creditors or the state.-Etymology:...
.
Advantages and disadvantages
The advantages and disadvantages of an IVA compared with other debt solutions are particular to a debtor's individual circumstances and professional advice should be sought to decide on the best option.Stigma
An IVA is a private agreement between a debtor and creditors. As of April 6, 2009 Bankruptcy is no longer advertised in the local newspaper, only in the London GazetteLondon Gazette
The London Gazette is one of the official journals of record of the British government, and the most important among such official journals in the United Kingdom, in which certain statutory notices are required to be published...
. Both debtors in an IVA and bankrupts are listed publicly on the Personal Insolvency Register, and will be recorded by credit reference agencies.
Length
An income based IVA can often last up to 5 years, although it can be any length. A bankrupt is normally automatically discharged after just 1 year or less if the bankrupt is eligible for an early discharge. An Income Payments Agreement or Order in bankruptcy (if one is applied, depending on the individuals disposable income)will not last for more than three years and payments are generally much lower than under an income based IVA.Credit
Unlike Bankruptcy, an IVA does not statutorily restrict a debtor from obtaining credit, although the proposal may do so.In bankruptcy however one legally can obtain credit of up to £500 without disclosing one's status as a bankrupt. After a bankrupt is discharged there is nothing in law to stop the discharged bankrupt gaining credit.Ability to trade
Bankruptcy will usually dissolve a partnership and prevent a debtor from acting as a director of a company. A self-employed trader will have to disclose the fact that he or she is bankrupt when obtaining credit, for example when dealing with suppliers. There are no such implications with an IVA, although lenders often ask.Credit rating
Although arguably an IVA is seen as more positive than bankruptcy in the eyes of creditors, as it shows a certain commitment to repaying debt, in reality an IVA is likely to have an equally detrimental effect on a debtor's credit rating as bankruptcy. Usually a debtor's credit rating is already poor before an IVA or bankruptcy is considered however. Both bankruptcy and an IVA will stay on a debtor's credit file for 6 years from the start of the IVA/bankruptcy.Fees
There are two separate fees payable in an IVA. Both of these fees are paid as part of the Arrangement and are included in the monthly contributions made to the IVA. These fees do not generally affect the total amount payable, but instead reduce the final dividend that each creditor hopes to receive from the IVA. As a result, an Insolvency Practitioner must agree his fees with voting creditors before an IVA is accepted.The Nominee's Fee is a fee charged in relation to the work performed up to the point when the IVA is agreed. It is reclaimed from payments into the IVA before any dividend is paid to creditors.
The Supervisor's Fee is an ongoing fee in relation to the work performed during an IVA. It is reclaimed from payments into the IVA at regular intervals, as agreed with voting creditors. This could be quarterly or annually depending on the rules stipulated in the individual's proposal.
Some Debt Management Companies try to include an extra IVA arrangement fee.
Protection
A major advantage of an IVA over debt management arrangements is that all unsecured creditors are bound by it once it has been agreed: even if they did not agree to the IVA at the meeting of creditors. As only those creditors who vote at the meeting are counted, those creditors who did not vote at all are still bound by the decision, as are those who voted against it if they are outvoted (see above). Creditors bound by the IVA cannot take enforcement action to recover the debt, but instead submit a claim in the IVA and are paid by the Supervisor.The home
Perhaps the biggest advantage to an IVA over Bankruptcy is the control the debtor may have over their home. In bankruptcy, the debtor's assets will vest in the Trustee (some assets are excluded, notably those used as tools of tradeTools of trade
Tools of trade is a term generally used in bankruptcy law to determine what property a person would commonly use for the purpose of making a living, as items that are tools of trade are separately exempt from attachment with an additional amount above that normally given for a person's...
, ordinary household contents). This will usually include equity in their property and the Trustee may force its sale. An IVA proposal may exclude the property altogether, or propose a re-mortgage or offer income based contributions for a longer period in lieu of the debtor's equitable interest in the property. The Supervisor may register a restriction on the property to ensure that his or her consent is required before the property is, for example, sold or re-mortgaged.
Failure
If an IVA fails because an individual can not keep up with the repayments (or agree new terms with the trustee and creditors), then bankruptcy becomes a real possibility. Because a significant proportion of IVA repayments go towards payment of the Nominee's and Supervisor's fees, people who have failed an IVA often find they had not paid as much of the debt off as they had expected.Additionally, creditors will also add on interest and charges to the debts from the Meeting of Creditors date to the date of failure (currently 8% per annum), thereby increasing the level of debt.
The roles of the Insolvency Practitioner
An IVA can only be administered by a Licensed Insolvency Practitioner. At each stage of the IVA process, the Insolvency Practitioner's role changes.Adviser
The adviser does not have to be an insolvency practitioner, though often is. The adviser should inform the debtor of all the solutions available, commonly including dealing with priority debts first, re-mortgage, consolidating debts into a loan, debt management, bankruptcy, a Debt Relief OrderDebt Relief Order
Chapter 4 of the Tribunals Courts and Enforcement Act 2007 introduced Debt Relief Orders as a new form of bankruptcy in the United Kingdom. A DRO will be a simplified, quicker and cheaper alternative to bankruptcy in the United Kingdom, suitable for debtors who have few or no assets and little...
, and IVA. The adviser should look at all the debtor's circumstances, what they own, what they owe, and their household income & expenditure to advise the best solution. The adviser can charge for debt advice or offer it within a charity capacity where they will not pay for the debt advice. Charitable debt advice agencies include Citizens Advice Bureau
Citizens Advice Bureau
A Citizens Advice Bureau is one of a network of independent charities throughout the UK that give free, confidential information and advice to help people with their money, legal, consumer and other problems....
, CCCS, Christians Against Poverty
Christians Against Poverty
Christians Against Poverty is a Christian charitable company in the United Kingdom founded in Bradford, West Yorkshire by John Kirkby in 1996...
& Debt Support Trust
Debt Support Trust
Debt Support Trust is a debt advice charity helping people throughout the United Kingdom. The charity offers consumer debt advice via the telephone and internet.-Legal information:...
.
Nominee
If an IVA is considered appropriate, the Insolvency Practitioner will become the Nominee. There is a misapprehension that it is the Nominee's role to advise the debtor on drafting a proposal to the creditors. This is in fact not the case. The legislation is clear that this is the task of the debtor and his/her advisers, which nevertheless may be the Nominee's firm.It is instead the Nominee's task to review the proposal on which he has been asked to act, and to report on it.
In practice, the proposal is generally a standard document which is modified to the each debtor's particular circumstance. Common terms will include:
An analysis of the debtor's income (A) and expenditure (B). From this, the debtor's disposable income is calculated (A)-(B) and this will become the amount that will be paid into the IVA periodically (usually monthly). The period is usually five years, but can be any length. The proposal will usually state that if the disposable income increases during the term of the IVA, the amount to be paid will also increase proportionately.
A background history explaining how the debtor's financial difficulties arose.
Details of any assets that are to be realised or excluded. For example, how the matrimonial home will be dealt with, pension schemes, share save schemes, vehicles, etc.
The ability to call future meetings of creditors in the event that circumstances change, to modify the terms of the IVA.
Restrictions on obtaining credit. This is because a debt incurred after the approval of the IVA could result in a bankruptcy petition from a creditor, which would almost certainly cause the IVA to fail.
Chairman
The Chairman will hold the meeting of creditors and negotiate with the debtor and creditors to approve the proposal. It is common for creditors to ask for modifications to the proposal at the meeting. Common modifications put forward by major banks include restricting the debtor from obtaining credit, ensuring payments increase if the debtor's income increases, specifying a minimum return such as 40 pence in the pound, and insisting that the Supervisor fails the IVA if the debtor misses 3 or more payments, and petitions for the debtor's bankruptcy.Supervisor
If the IVA is approved, the Insolvency Practitioner named as Supervisor in the approved IVA becomes the Supervisor of the IVA. This involves reporting annually to the creditors, debtor and the court. It also involves monitoring that the debtor is complying with the terms of the arrangement, agreeing creditor claims, making payments to creditors and generally ensuring that the arrangement progresses in accordance with the terms of the proposal. The debtor must comply with all reasonable requests of the Supervisor, which may include periodically providing bank statements, accounts, wage slips etc.See also
- Company Voluntary Arrangement (the equivalent for companies)
- Simplified Individual Voluntary ArrangementSimplified Individual Voluntary ArrangementIn the United Kingdom, a Simplified IVA was a proposed new form of IVA , which would have been a formal alternative of clearing debt without being declared bankrupt.The new regime was likely to have been two tiers:...
- BankruptcyBankruptcyBankruptcy is a legal status of an insolvent person or an organisation, that is, one that cannot repay the debts owed to creditors. In most jurisdictions bankruptcy is imposed by a court order, often initiated by the debtor....
- LiquidationLiquidationIn law, liquidation is the process by which a company is brought to an end, and the assets and property of the company redistributed. Liquidation is also sometimes referred to as winding-up or dissolution, although dissolution technically refers to the last stage of liquidation...
s - Administrations
- Administrative Receiverships
- Trust DeedsProtected Trust DeedA trust deed is a voluntary but formal arrangement that is used by Scottish residents where a debtor grants a ‘trust deed’ in favour of the trustee which transfers their estate to the trustee for the benefit of creditors. It can be a way for people to deal with debt problems...
(only available in Scotland) - Sole Trader InsolvencySole Trader InsolvencyAccording to the Office for National Statistics, sole proprietors represented 23.8% of all UK enterprise in 2010. Of that number, more than half a million sole traders were operating via the PAYE or VAT system alone. Sole traders are a distinct legal entity, operating as one type of UK business...
External links
- Insolvency Service website
- Insolvency Practitioners Association website
- "How to sort out your debts" - Citizens Advice BureauCitizens Advice BureauA Citizens Advice Bureau is one of a network of independent charities throughout the UK that give free, confidential information and advice to help people with their money, legal, consumer and other problems....