For anyone facing bad debt that they can’t pay off in the short term, an individual voluntary arrangement (IVA) can be an ideal way of clearing the debts over a longer period, without being vulnerable to action by their creditors.
IVAs are arranged on the basis of what the debtor can afford on a monthly basis. As we know all too well, however, inflation is now running at a 40-year high, driven largely by increases in fuel, energy and food prices, and is showing no sign of improving any time soon. This has totally changed the situation for many people with IVAs, prompting the Insolvency Service to issue new guidelines.
What Is an IVA?
An IVA is an arrangement under which a debtor can pay off all or part of their debts through regular instalments to an insolvency practitioner, who distributes the money among the creditors. At least 75% of creditors must agree to the arrangement for it to come into force.
If the debtor defaults on payments, however, the IVA could collapse. In this case, they’d be liable not only for the whole debt, but also for any costs or fees associated with the IVA. This could leave as the only option a more drastic measure, such as bankruptcy.
What’s the New Advice?
The Insolvency Service’s new advice recognises that the “current financial climate, rising inflation, and increases to energy and other household outgoings” which were unforeseeable when the arrangement was agreed “may have an impact on a consumer’s ability to be able to make monthly contributions…at the same level as previously agreed”.
In view of this, the Service recommends that insolvency practitioners can consider, on a case-by-case basis, whether it would be appropriate to adjust payments to a level the debtor can cope with. If no realistic figure can be agreed, an alternative option would be to investigate whether the remainder of the debts could be written off on the basis of what’s already paid. Clearly, this is more likely to be viable the greater proportion has been paid.
What’s the Implication for Creditors?
This advice is obviously good news for debtors, but it might worry creditors of people with IVAs. However, according to Peter Wordsworth, the head of insolvency services at debt charity StepChange, “Creditors are now more receptive to early completion of the IVA where this is the most pragmatic option for people whose IVAs would otherwise fail”. He points out that this is often the most realistic chance for creditors to get as much if their money as possible.
If you’re a creditor of someone who’s struggling with an IVA, you won’t have any of these solutions forced on you, as all creditors have to agree. You’ll need to decide, however, which course would be in your best interests. Give me a call to discuss your options, if you’re faced with this kind of decision.