When an individual enters into an Individual Voluntary Arrangement (IVA), they are making a formal deal with their unsecured creditors to repay a proportion of their financial debt during a limited duration. The timeframe of an IVA is five years generally but it might be shorter when, for example, the borrower offers unsecured lenders a ‘one-off’ lump sum payment. The lump sum payment may originate from the sale of the debtor’s property or it might be funds provided by the debtor’s friends or family explicitly to permit him or her to pay back debts they have accrued. However, the majority of IVAs are based on monthly payments coming from the debtor’s disposable earnings for a period of five years. The question arises, how does the person in debt contend with secured creditors?
Secured creditors expect to be paid, during the time period of the IVA and afterwards, the full contractual repayments on secured loans made to the person in debt by them. A mortgage is a secured debt and so is a Hire Purchase agreement. A debtor who has a mortgage or who has obtained a vehicle via a HP agreement is expected to make their regular mortgage repayments to their mortgage company and also to make their car HP payments in full and on time, irrespective as to how the unsecured obligations are being dealt with in the IVA. The IVA offer sets out in detail how much the unsecured lenders are to be paid back and over what period of time.
Unsecured lenders in general obtain settlement of only a portion of the money owed within the term of the IVA. The amount they get is known as a dividend. For example if a quarter of the unsecured liabilities are to be repaid in the IVA, the dividend is said to be 25p in the . The size of the dividend may vary. It really depends on what the person in debt is able to afford to pay and what the unsecured lenders are prepared to consent to. Only some unsecured creditors exercise their right to vote when deciding whether to accept or reject a debtor’s IVA offer. Of the unsecured creditors who choose to vote, at least 75% of them as measured in ‘s, must agree to accept the IVA offer before the IVA can come into being. Unsecured creditors who do not vote are still bound by the final decision of those that do. In reality the dividend will often come in the range of 20p in the to 40p in the , although of course it can sometimes be much below that range and at times higher, even up to 100p in the . In a very few instances, unsecured creditors might actually get 100p in the and indeed they may also be given statutory interest on top of that.
When a debtor offers proposals for an IVA, unsecured creditors are not bound to agree to the proposal. If they believe that the person in debt can pay in excess of the amount of money offered initially, then they can propose modifications to the IVA that will normally have the outcome of increasing the amount of the debtor’s regular contributions or they can seek to prolong the term of the IVA by an additional six months or maybe more. The borrower can of course refuse to agree to such modifications and in that case the IVA proposal will usually be rejected. On occasion, creditors may be agreeable to moderating their requirements for enhanced payments but that would be the exception and would only occur if they could be credibly persuaded that the person in debt cannot really afford the additional payments and that the proposed modifications would be likely to cause the failure of the IVA in the course of supervision and prior to completing the full time period.
If the person in debt posesses a mortgaged property, unsecured creditors don’t skip over that reality. They will examine the up-to-date market value of the property and the amount of money that the borrower presently owes to the mortgage provider. The debtor is asked to provide a current, real and honest market valuation of the property as well as a recent mortgage redemption statement from their mortgage provider. This type of statement would express the all inclusive costs of paying off the mortgage, including any early redemption penalty that might be applicable. By using these two bits of data, unsecured creditors can quickly determine if there is any realisable equity in the property. When there is, the unsecured creditors may, by way of modification to the IVA proposal, require the borrower to re-mortgage the property over the life of the IVA and to introduce some or even most of any released equity into the IVA for their benefit.
A well designed IVA offer would already have a provision for re-mortgaging the property and giving equity to lenders. However, it may well be that re-mortgaging isn’t an alternative for the debtor on the grounds that no mortgage provider will take them on due to their weak credit history or as a result of the ongoing contraction in the mortgage market due to the economic collapse. Even if the debtor can negotiate a re-mortgage, they may possibly be required to pay premium mortgage rates.
Should there be no equity in the debtor’s property, unsecured lenders will check out the amount of the monthly mortgage repayments. If they are excessive, lenders could suggest a modification to the IVA requesting the debtor to sell the property and move to rental housing. The explanation is that the cost of rental housing would be significantly less than the monthly mortgage costs and the debtor could increase their contributions into the IVA by the sum saved each month. As a yardstick, mortgage payments that surpass 40% of net family earnings would ordinarily be considered to be excessive.
In recent years, property values have dropped greatly, and many individuals learn that their property is in adverse equity. This basically means that the cost of redemption of their mortgage is higher and in some cases appreciably higher than the current market value of the property. If compelled to sell, the deficiency due to the mortgage provider would become a further unsecured debt and so would rank for dividend with the other unsecured lenders, and consequently reduce the dividend in an IVA.
The debtor’s partner or spouse could have an equitable interest in the property. More often than not that interest is 50% of the equity. The debtor’s family members can also have rights of residing in the property which might make a forced sale complicated for lenders, at the very least. To summarize then, an IVA can certainly have an impact on the debtor’s mortgage but the best thing is that generally, borrowers will not lose their house in an IVA.
Any time a person in debt is pondering if they should go into an IVA and is concerned that it may affect their mortgage, they ought to initially discuss their situation with an Insolvency Practitioner, otherwise known as an IP, for advice. An experienced IP will look at all of the debtor’s financial circumstances and will counsel him or her on all the alternatives available, while not generally billing for such preliminary guidance. Possibilities in addition to an IVA might incorporate petitioning for bankruptcy or if the borrower is not insolvent, going into a Debt Management Plan (DMP) and there may be other choices out there also. The person in debt can go for the best choice for themselves in the light of the guidance provided by the IP. When there is property like the family residence involved, the person in debt and their spouse or partner also need to look for impartial legal advice so that the rights of all parties are safeguarded.
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