Individual voluntary arrangements and bankruptcy
An Individual Voluntary Arrangement is seen as preferable to being made bankrupt as the debtor can retain his tools of trade and, in the case of a professional person, continue to practice, or hold company directorships. IVAs can be set up for either a person or a company. An insolvency practitioner petitions the high court for protection for a borrower debtor under an IVA. A proposal is put to the creditors of whom 75% must accept.
If this is achieved, the arrangement becomes binding upon debtor and all creditors named in the agreement. If the debtor fails to meet payments under an IVA the insolvency practitioner is likely to petition for the individual to be made bankrupt. Whilst bankruptcy normally lasts for only three years some creditors insist that IVAs last a longer period.
How do individual voluntary arrangements work?
Firstly, your creditor(s) - the companies or individuals you owe money to - must agree to the IVA. The IP will then assess your financial situation and propose one, affordable, monthly payment you must make over the next five years. The level of payment deemed affordable will be based on your income minus your outgoings.
The IP will review your financial situation regularly over the course of the next five years. If you keep up the payment, at the end of the five year term, an interim court order will be granted, guaranteeing that none of the creditors can then pursue you for any money.
How do individual voluntary arrangements affect mortgages?
With endowment policies attached to any mortgages, you may well be expected to cash it in and use the money to pay your creditors. If you have a fair amount of equity in your property (ie, properties are worth substantially more than the mortgages on them), you may also be expected to release some of that equity - usually at the end of the five years - to pay the creditor. This may sound drastic, but if the creditor is a mortgage lender, it can be the best way for you to avoid having your home repossessed and get back on an even keel.
Individual voluntary arrangements in depth
IVAs are unlikely to be granted for any longer than 5 years. A percentage of the debt will usually be written off.
Once an IVA is agreed, your creditors have to stop adding interest and late payment charges. It is unlawful for them to do otherwise.
Creditors can not break the agreement at any time and are bound by their terms as it is a court order.
It is important that consumers do not confuse IVAs with Debt Management Plans, which are not legally binding. IVA creditors cannot chase for debts in any way.
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