The purpose of these articles is to provide simple and straightforward answers to questions that people would like to ask about IVAs and insolvency in general but may refrain from doing so for all sorts of reasons. Let’s start by looking at a situation when somebody is planning to get married but is afraid that their fianc may be insolvent and that their insolvent fianc’s creditors might seize their assets. While love may be blind, it would be normal for couples to disclose to each other the state of their finances before getting married or even starting to co-habit. This is sensible because failure to disclose financial problems before starting to live together could lead to a breakdown of trust later on in the relationship when one party turns out to be insolvent and their financial difficulties come to the attention of the other solvent party.
However even when there is no disclosure before co-habitation, the solvent party can take steps to protect their assets and income and should have nothing to fear on a legal or moral basis from their insolvent partner’s creditors. The insolvent party can investigate various financial solutions without compromising the finances of their solvent partner. Such solutions may include entering into an IVA or even petitioning for bankruptcy. The solvent party may choose to support his or her partner financially in such a solution but is not obliged to do so. Both parties should seek the advice of an insolvency practitioner and obtain independent legal advice before proceeding on an insolvency solution.
People generally want to know how long an IVA will last before they commit to going down that route. The duration of an IVA really depends on the debtor’s circumstances. The four key factors are the debtor’s assets, debts, income and expenditure. Of course the attitude of creditors is crucial and this is expressed at the meeting of creditors which precedes the commencement of the IVA. In practice the debtor’s IVA proposal spells out the proposed duration and while most IVAs have a planned term of five years from the date of commencement the duration can be as short as a few months or as long as seven years. The shorter duration IVAs are often based on what is described as a ‘one-off’ proposal, where the main contribution to be made by the debtor is a lump sum. In such cases the lump sum may for example come from the proceeds of the sale of property, or from the release of equity by the remortgage of property or be monies advanced by the debtor’s spouse or by other members of the debtor’s extended family. If the debtor has regular disposable income as well as assets the IVA may well be a combination of a lump sum and monthly contributions from income and in such a case the duration could be five years or longer. However the availability of the lump sum might be dependent on the debtor’s capacity to repay the source of the lump sum (family or re-mortgage provider) from income and in some cases the disposable income would be largely committed for that purpose. If that is the case, the duration of the IVA could be relatively short.
A couple of additional factors impact the time period of the IVA. Lenders might, at the meeting of creditors, look for an extension to the suggested time-span in order to improve the dividend or to tackle the possible value which could accumulate in the debtor’s property during the normal five years duration of the IVA. The other issue is that the debtor’s situation may change for the worse through the life of the IVA and he or she can no longer afford to pay the monthly contributions which were offered in the initial IVA offer and which were accepted at the meeting of creditors. One solution to this problem is to reduce the monthly payments and to raise the number of monthly payments to be made so as to achieve the dividend initially proposed. The procedure to get this done is for the supervisor of the IVA to call a ‘variation meeting’ of creditors to consent to the lower payments and extended length of time. In general IVAs last five years with a small number having a much reduced duration of as little as six months and an even lower percentage lasting six or seven years.
The cost of an IVA is a matter of concern to anybody contemplating going down that route, especially since they are already enduring money difficulties and can usually ill-afford additional outlay of money. Assuming they hire the services of an IVA firm, should they make or have to make pre-IVA payments to that firm? This is a hot subject and it is a issue of concern for the OFT. The opinion among reputable firms of IVA providers is that pre-payments are not on their own a concern providing there is a established and agreed course of action by which such pre-payments are returned to the person in debt should he or she decide to withdraw their application for an IVA or in the situation that the IVA proposal is refused in the meeting of creditors. The debtor’s natural expectation is that such a pre-payment may become the initial monthly contribution to the IVA so as, if the proposal was for sixty monthly contributions overall, there would be fifty nine further contributions to be paid. This is a matter on which IVA firms need to be really clear when dealing with the borrower. Really, the IVA offer itself should disclose whether or not such pre-payments have already been made and the full sum handed over before the meeting of creditors. Still, creditors might in their wisdom determine that these types of pre-payments must be in addition to the sixty proposed payments and can change the IVA in that matter. Whilst the debtor might possibly feel aggrieved, creditors take the view that the IVA clock does not start ticking until the IVA proposal is agreed upon at the meeting of creditors. Lenders consider that if the debtor could lodge funds with the nominee prior to that time, then such monies should go towards enhancing the dividend for their gain. Here’s the text of a regular modification to IVAs made by creditors at the meeting of creditors regarding payments made to the nominee pre IVA:’ the balance of any payments made to the nominee or any third parties in relation to the original consultation or preparation of these proposals, less the fee agreed by the debtor, will immediately be paid into the arrangement for the benefit of unsecured creditors. Any such sums are to be paid in addition to the contributions offered in the original proposal.’
Why should a debtor have confidence in the advice of an Insolvency Practitioner (IP) and what qualifications does an IP have to have? To become qualified as an IP in the UK, one needs to have a certain minimum number of hours of experience of working in an insolvency practice, currently about 600 and to have passed the Joint Insolvency Examination Board (JIEB) examinations. Most IPs would also be qualified accountants and members of a relevant recognized professional body (RPBs). An IP’s support staff would usually include qualified accountants and people with ancillary qualifications in insolvency such as the Certificate of Proficiency in Insolvency (CPI). Every firm which offers insolvency services employing such professionals and supporting debt advisors is required to have a consumer credit license. The R3 website provides details about relevant insolvency qualifications in the UK. Interestingly, there is no insolvency qualification equivalent to the JIEB in the Republic of Ireland nor is there the requirement for a debt adviser there to hold a consumer credit license. It is expected that new legislation recommended by the Law Reform Commission final report on Personal Debt Management and Debt Enforcement, which was published in December 2010, will be enacted in Ireland in the next year. It is expected to address the need for insolvency qualifications and to implement a regulatory and licensing regime similar to that currently in place in the UK.
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