Under the provisions of The Insolvency Act 1986 an IVA is a formal legal process that allows a person who
is insolvent and who is struggling to repay credit and other debts, to arrange with their creditors to pay off what is owed at an affordable rate over a fixed period (usually to a maximum of 5 years), after which any outstanding balance in written-off. Entering into an IVA is often preferable to bankruptcy and one of a number of options which should be considered. The main difference between a personal IVA and an IVA taken out by a self-employed person is that a self-employed person can include business and tax debts in the IVA.
Who can apply for a self-employed IVA
Anyone who is self-employed can apply for an IVA, including:
- Sole traders;
- Buy-to-let landlords; and
- Builders and self-employed construction workers.
Certain criteria must be met:
- The amount of unsecured debt owed must be appropriate for an IVA. The key consideration here is how much debt could be paid off at an affordable rate over five years. Suppose someone owes ₤80,000 and can afford to pay ₤800 a month into an IVA. After 5 years they will have repaid ₤48,000 and still owe ₤32,000.
In these circumstances creditors are likely to agree to an IVA.
- Applicants must be able to prove they have an income from which payments into the IVA can be made
or a one off third party contribution. Records of trading and
business accounts will be examined and a cash flow forecast for the
next twelve months may be requested.
- There must be unsecured creditors; these can include Her Majesty’s Revenue and Customs. Debts such as Court Fines, Student Loan Company debt and Child Support Agency arrears are exempt from inclusion in an IVA.
An IVA can only be arranged by a Licensed Insolvency Practitioner who, after establishing the financial position, will advise whether an IVA is the most suitable way forward for the applicant and what other options are available for dealing with the problems they are facing.
The Insolvency Practitioner will need proof of income and debts owed and will work with the applicant to determine their monthly budget (excluding unsecured debt repayment). The monthly budget is the amount needed to live on each month, including payments for housing costs, council tax, gas, electricity, water, necessary travel costs for the applicant and their family (this can include reasonable costs of running a vehicle), food, phone, mobile phone and internet charges. Creditors may object to expenses that seem unreasonable in the circumstances, e.g. the cost of an expensive
vehicle when a cheaper one would meet the applicant’s needs or high mortgage
interest payments on an expensive property where the applicant could easily
The difference between income and monthly outgoings is the amount deemed available to pay into the IVA. If a business is subject to seasonal fluctuations or erratic cash flow it may be possible to build some flexibility into the IVA. The Insolvency Practitioner will calculate what percentage of the overall debt is owed to each creditor and apply that percentage to the available income to determine
what return to creditors is likely. At the time the proposals are available the Insolvency Practitioner gives the creditors 14 days notice of a Creditors’ Meeting
together with a copy of the proposals. Seventy five percent by value of creditors must vote to accept an IVA. It is unusual for creditors to attend the Creditors’ Meeting and votes are usually sent to the Insolvency Practitioner.
Once the IVA is set up, the agreed payment is sent to the Insolvency Practitioner each month and after deducting fees they
distribute the remaining funds in accordance with the proposal. The IVA will be subject to annual review and any windfall, inheritance,
lottery win, income or capital received by the applicant from another source must be disclosed immediately.
If an applicant has equity in a property, they are expected to set out in the IVA how that should be treated. Usually, unless the applicant’s share of the equity is less than ₤5,000, creditors would expect,
at least, that the property be remortgaged towards the middle of year 5 of the IVA period to release equity.
If Remortgaging not an option
If remortgage is not an option the Insolvency Practitioner has discretion to:
- Accept into the IVA payment by a third-party of an amount
in lieu of the applicant’s equity in a property; or
- Extend the period of the IVA by 12 months.
It is important that a person applying for an IVA understands how ownership of property is dealt with in the IVA process.
Advantages of an IVA
There are many advantages associated with setting up an IVA including;
- All unsecured debts can be included in the IVA;
- Monthly debt payments can reduce significantly;
- Applicants make one monthly payment to the Insolvency Practitioner;
- Once an IVA has been accepted pressure from creditors should cease, including any action by bailiffs and debt collectors;
- Any legal action pending for recovery of unsecured debt is halted;
- Interest, late payment and other charges are frozen;
- At the end of the IVA period any balance outstanding is written-off;
- There is a good chance the applicant would be able to continue trading; and
- If the applicant had an interest in property the process provides a choice of how that should be treated before a creditor can force a sale.
Disadvantages of an IVA
There are some disadvantages with IVAs, these include:
- IVAs being a formal, quite rigid, legal arrangement which if broken can lead to bankruptcy;
- The applicant’s credit file is affected from the start of the IVA;
- Further credit must not be applied for during the period of the IVA;
- Applicant’s details will be added to the Insolvency Register which is
publicly available. This is unlikely to be a problem and is different from details of bankruptcy being published in a local newspaper;
- Applicants are expected to attempt to remortgage to release any equity in a property; and
- Large or valuable assets may have to be sold and proceeds paid into the IVA.
Applicants should be aware of set-off rules whereby a bank can transfer money from an account held by a person which is in credit to one held by the same person that is in trouble. Any debt owed to a bank should be included in the IVA and the applicant will be advised to change banks and, if possible, hold personal and business accounts with different providers.