By Lorraine Conway

26 August 2021 Individual Voluntary Arrangements (IVAs)

Summary 1 Introduction 2 IVAs and other alternatives to bankruptcy 3 Main characteristics of an IVA 4 Explanation of the IVA process 5 Regulation of IVA providers 6 Proc and cons of an IVA

commonslibrary.parliament.uk Number 5165 Individual Voluntary Arrangements (IVAs)

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Contents

1 Introduction 5

2 IVAs and other alternatives to bankruptcy 6

2.1 Available debt solutions 6

2.2 Reviewing current IVAs 7

3 Main characteristics of an IVA 8

3.1 Formal legal agreement 8

3.2 Who is eligible for an IVA? 9

3.3 What debts can be included in an IVA? 9

3.4 Can debts owed to family members be included in an IVA? 10

3.5 What happens to the debtor’s home? 10

3.6 How much will an IVA cost? 11

4 Explanation of the IVA process 12

5 Regulation of IVA providers 14

5.1 IVA Protocol 14

5.2 Recognised professional bodies 14

5.3 Complaints 15

6 Proc and cons of an IVA 17

6.1 Main advantages 17

6.2 Main disadvantages 17

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Summary

An Individual Voluntary Arrangement (known as an IVA) is a legally binding agreement between a debtor and his/her creditors. The agreement sets out how creditors will be repaid and normally involves setting up monthly repayments over a specified period. Alternatively, if an asset (such as a property) can be sold, the agreement may specify that the proceeds from the sale will be used as payment. An insolvency practitioner will normally assist in working out what the debtor can afford to repay and how long the IVA should last. The IVA will start if creditors holding 75% of the total debt agree to it. For an IVA to be approved, the IVA proposal must usually offer a higher return to creditors than could otherwise be expected were the debtor to be made bankrupt. Once approved, the IVA will apply to all creditors, including any who voted against it.

For the purposes of an IVA, a ‘debtor’ is taken to mean an individual, sole trader or partner (in a business partnership). It is important to note that an IVA can be cancelled by the insolvency practitioner if the debtor fails to keep up with repayments.

An IVA is an alternative to bankruptcy for a debtor who is in financial difficulty. The main benefit of an IVA is its flexibility and the fact that (unlike bankruptcy) it allows the debtor to retain control of his/her assets. However, they can be expensive and there are other disadvantages associated with IVAs.

This briefing paper provides an overview of IVAs. It includes information on who might be eligible for an IVA; the IVA process; and the advantages and disadvantages associated with IVAs. It should be noted that IVAs apply only to England, Wales, and Northern Ireland. Scotland has its own law on personal insolvency, including the option of a Protected Trust Deed.

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1 Introduction

An IVA is an agreement entered into by a debtor with his/her creditors to pay off their debts over a specified period of time. It is a formal, legal debt solution. This means it is approved by the court and both the debtor and his/her creditors must adhere to the terms of the IVA. An IVA must be set up by a qualified insolvency practitioner, who will deal directly with the creditors throughout the life of the IVA. Of course, the insolvency practitioner will charge a fee for setting up and supervising the IVA.

In practice, once a debtor decides to enter into an IVA, their first step will be to work out a repayment plan with their insolvency practitioner. This repayment plan is then put to the creditors. Acceptance of an IVA proposal requires 75% in value of those creditors who vote either in person or by proxy at the meeting.1

Assuming the creditors agree the plan, the IVA will start. The debtor will pay his/her creditors back a set amount each month over a specified period, usually 5 years. This monthly repayment will be paid directly to the insolvency practitioner who will then distribute the money to the creditors, having deducted their fee. At the end of the specified period, if the debtor’s payments into the IVA are not enough to repay all their debts in full, the balance will usually be written-off.

The main advantage of an IVA is its flexibility, it can be “shaped” to fit the individual needs of a debtor. However, an IVA can be expensive and there are other risks to consider (see below).

1 “By value” means voting creditors who hold more than 75% of the total debt, not the number of creditors there are

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2 IVAs and other alternatives to bankruptcy

2.1 Available debt solutions

An IVA is just one option available to an individual in financial difficulty - it is not the only option (see Box 1 below). Insolvency practitioners are under an obligation to ensure that people in financial difficulty enter the right solution for their individual circumstances and that, once implemented, it remains appropriate.

1. Alternatives to bankruptcy

For an individual in financial difficulty, there are four main alternative options to bankruptcy. They are:

• Informal Arrangement – this is where the debtor writes to all his/her creditors to see if a compromise can be reached. To have any hope of success, the debtor should include a timetable of when he/she will repay each creditor. However, an informal arrangement is not legally binding.

• Individual Voluntary Arrangement (IVA) – an IVA is a formal legally binding agreement between a debtor and his/her creditors.

• Personal Administration Order – such orders are only suitable for those individuals who have personal unsecured borrowings (i.e., debt) of £5,000 or less. It is a way for an individual to deal with debt if they have several county court judgments (CCJs) against them, in aggregate only owing a relatively small amount. Under this court order, the debtor makes a monthly payment to the court, and the court will divide this money between the creditors. While the debtor is making payments in accordance with the Administration Order, creditors listed on the order can't take any further action against the debtor to get their money without the permission of the court.

• Debt Relief Orders (DROs) - DROs are suitable for people who do not own their own home, have few assets (less than £2,000 in total), have little

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surplus income (less than £75 to spend each month after paying tax, national insurance, and normal household expenses), and less than £30,000 of debt. An order lasts for 12 months. In that time creditors named on the order cannot take any action to recover their money without the permission of the court. At the end of the moratorium period, if the debtor’s circumstances have not changed, all debts included in the DRO are written-off. If the debtor’s circumstances have significantly improved, creditors may receive payment. The benefit of a DRO is that it does not involve the courts; a DRO is administered by the Insolvency Service in partnership with approved intermediaries (debt advisers). It should be noted that a DRO is only available if the debtor lives in England, Wales, or Northern Ireland. DROs are not available in Scotland. However, a Minimal Assets Process (MAP) bankruptcy offers a similar solution to Scottish debtors, but has different benefits, risks and fees associated with it.

The rest of this paper deals only with Individual Voluntary arrangements (IVAs).

2.2 Reviewing current IVAs

Insolvency practitioners (IPs) are under an obligation to ensure that people in financial difficulty enter the right solution for their individual circumstances and that, once implemented, it remains appropriate.

The criteria for individuals in debt to enter a Debt Relief Order (DRO) changed on 29 June 2021. According to the Insolvency Service, insolvency practitioners who supervise IVAs should consider the impact of the changes to the DRO criteria on their portfolio and if necessary, put in place a policy to review IVA cases in order that they approach cases consistently.2 It said:

When determining when to review cases, insolvency practitioners should look at consumers’ individual circumstances in order to decide whether this should happen immediately or at their annual review. After consideration, if an IVA is no longer the best option for that consumer, they should be directed to appropriate advice and supported by their supervisor through any transition. If insolvency practitioners are unsure how they should approach particular cases, they should approach their RPB for advice.3

2 Insolvency Service, “Dear Insolvency Practitioner – issue 133”, July 2021 3 Ibid

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3 Main characteristics of an IVA

3.1 Formal legal agreement

An IVA is a formal legal agreement between a debtor and their creditors. The aim of an IVA is to agree a repayment plan so the debtor can avoid bankruptcy. To achieve this aim, the IVA must present a realistic proposal, offering creditors a higher repayment than could otherwise be expected were the debtor to be made bankrupt.

As a formal legal agreement between the debtor and his/her creditors, an IVA can be set up in different ways. For example, an IVA might be:

• a monthly income payment arrangement, whereby a set amount is paid by the debtor from his/her income each month for a set period (usually over a 3 or 5-year period); or • a lump sum fixed term or a short-term arrangement, whereby an expected lump sum is used to make a payment to creditors (e.g an asset might be sold, a property re-mortgaged, or a family member might make a cash contribution).

Some IVAs are a mixture of monthly instalments and lump sum payments.

An IVA must be set-up by a licensed insolvency practitioner. Unlike an An IVA is legally informal arrangement to repay debts, an IVA is legally binding and prevents binding provided all creditors notified and therefore included in the IVA from taking any the debtor does not enforcement action against the debtor post-agreement (assuming the debtor default on complies with their obligations set out in the IVA). repayments An IVA can therefore be an effective way for someone in financial difficulty to deal with their debts. However, an IVA will only include unsecured debts, secured debts, such as mortgage repayments, are excluded.

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3.2 Who is eligible for an IVA?

An IVA is available to all individuals, sole traders or those in a business An IVA is available partnership who are experiencing financial difficulty. For example, a sole to individuals, sole trader might elect to enter into an IVA to “ride-out the storm” if they believe traders, partners (in their business will be profitable in the future. An IVA might also be useful to a a business debtor who owns his/her own property and wants to avoid the risk of losing it should they be made bankrupt. partnership) However, an IVA is not right for everyone and the debtor must meet certain criteria. Specifically, the debtor would normally need to show:

• they are resident of England, Wales, or Northern Ireland (debtors who live in Scotland should consider a Protected Trust Deed), • they are insolvent - this is generally taken to mean that they cannot pay their debts as they fall due, • they have some spare income each month to pay creditors, • and/or they have an asset that can be sold, re-mortgaged etc.

Any number of debts can be included but normally an IVA will be suitable if the debtor has more than three debts and two or more different creditors. Any amount of debt can be included in an IVA, there are no minimum or maximum limits set by law. However, as Citizens Advice points out, the fees for an IVA are high so if the total debt is less than £10,000 an IVA might not be the best option.

An IVA will normally only be right for a debtor if they have a regular and The debtor must be predictable income. This is because an IVA usually depends on the debtor honest and disclose making monthly payments to his/her creditors over a period of a few years. If all assets to their the debtor’s income changes from month to month, an IVA may not be right insolvency for them. practitioner A debtor does not have to own assets to get an IVA. However, any assets they do own might help them to repay their debts (for instance, a car or property could be sold or re-mortgaged). The debtor is expected to be honest with his/her insolvency practitioner and to seek their advice on what assets should be included in the IVA.

3.3 What debts can be included in an IVA?

Most “non-priority” debts can be included in an IVA, including the following:

• bank and building society loans and overdrafts • credit cards • personal loans

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• store cards • charge cards • catalogue loans

An IVA can also include some “priority” debts, such as:

• council tax arrears • tax debts • fuel debts (e.g gas and electricity arrears) and so on

However, the following debts cannot be included in an IVA:

• maintenance arrears that have been ordered by a court • child support arrears • magistrates' court fines • student loans • mortgage, secured loan4 or rent arrears unless the lender or landlord agrees (which is unlikely)

These debts will need to be dealt with separately. The debtor must make sure that they have enough money to pay these debts before paying money into an IVA.

3.4 Can debts owed to family members be included in an IVA?

I f a debtor owes money to family members or friends, they can be included in an IVA. However, the debtor’s insolvency practitioner (nominee) is under a duty to scrutinise such debts thoroughly.

3.5 What happens to the debtor’s home?

If the debtor owns his/her own home, the IVA proposal may (but not always) include an “equity clause”. This means that during the life of the IVA (often in year 4 of a 5-year fixed term IVA) the debtor may be expected to apply for a secured loan or re-mortgage to pay back some of the debt. Whether an equity clause is appropriate in an IVA will depend on the circumstances of a case. This is something that the insolvency practitioner (acting as nominee) should be able to advise on.

4 Secured loans are debts which are secured against a property (often the family home). An example of a secured loan is a mortgage with a bank or building society. If the debtor defaults on repayments, the lender can “repossess” the property.

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3.6 How much will an IVA cost?

The debtor must pay for an IVA to be set up by an insolvency practitioner. Insolvency practitioner fees will vary depending on the work involved. According to Citizens Advice, fees are in the region of £5,000 on average. A debtor who wants to set up an IVA should ask several insolvency practitioners for fee quotes/estimates to compare costs.

How and when the debtor pays the insolvency practitioner varies. Some practitioners will ask to be paid in full before setting up an IVA. Others will deal with the fees as part of the IVA; in effect, the fees will be taken from the monthly debt repayments.

In terms of what the fee covers, the insolvency practitioner must perform three roles throughout the life of the IVA and will charge for each. The roles are:

• Adviser: The insolvency practitioner will advise the debtor on whether an IVA is suitable.

• Nominee: The insolvency practitioner will help the debtor put together a proposal for an IVA, make an application to the court and hold a meeting with creditors to get agreement on the proposal. Legally, this work must be done by an insolvency practitioner.

• Supervisor: Assuming the court approves the IVA, and the creditors agree, the insolvency practitioner will supervise the IVA as it progresses, making sure the creditors receive the monthly payments (often referred to as ‘dividends’). The supervisor effectively acts as a go-between for the debtor and the creditors if anything changes.

Legal aid is not available for setting up an IVA.

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4 Explanation of the IVA process

An IVA must be set up by an insolvency practitioner, who acts as the debtor’s nominee. It is the nominee who draws up the IVA proposal using information provided by the debtor. The proposal should show why an IVA is in the interests of the creditors and should include full details of funds and assets available for the creditors. The nominee then submits this proposal to the court with his comments on the merits of the proposal.

If there is impending legal action (such as a possible bankruptcy petition), the Interim order nominee can also apply to the court for an interim order. An interim order is an order made by court precluding creditors from taking any action against the debtor whilst a meeting of creditors is called and held to decide whether the IVA proposals are acceptable to them or not.

Assuming an interim order is made by the court, the nominee is required to circulate to creditors the following information:

• The IVA proposal in full • The nominee’s comments on the debtor’s proposals • Notice of the date and location of the meeting of creditors to vote on the proposals • A statement of affairs, this effectively being a list of the assets and liabilities of the debtor • A schedule advising creditors of the requisite majority required to approve the IVA • A complete list of creditors • A guide to the fees to be charged by the insolvency “supervisor” following approval of the IVA • A form of proxy for voting purposes

The creditors meeting is held not earlier than following 14 clear days’ notice after the above has been circulated to creditors. The purpose of the meeting of creditors is to agree or reject the debtor’s proposal (with or without modifications which can be requested by creditors at the meeting).

Acceptance of the IVA proposal requires 75% in value of those creditors who Approval of an IVA vote either in person or by proxy at the meeting.5 However, it should be noted that the 75% relates only to those who actually vote and assuming the creditors receive notice of the proposal, all will be bound by the terms of the arrangement whether they voted or not. In effect, if the proposal is agreed,

5 ‘By value’ means voting creditors who hold more than 75% of the total debt, not the number of creditors there are

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it will be binding on all creditors who had notice of the meeting. However, there is one important exception – no IVA proposal may, without their consent, reduce the rights of preferential creditors6 or secured creditors.7

In practice, creditors may open “negotiations” about the terms of the IVA. For Negotiating terms instance, they might ask the debtor to pay more every month, or make of an IVA payments over a longer period, or include the sale of assets that the debtor does not want to lose. It is the role of the insolvency practitioner as nominee to advise the debtor on the exact terms of the IVA. If the IVA proposal is approved, a supervisor is appointed (usually the same insolvency practitioner who acted as nominee) to ensure the terms of the IVA are adhered to and to distribute dividends to creditors.

If the debtor’s circumstances change, he/she must tell their supervisor. What if the debtor’s Depending on the circumstances, the supervisor may ask the creditors to circumstances accept lower payments. If the creditors refuse to agree a “modified” IVA, or if change? the debtor continues to default on payments, the IVA will fail. If this happens, there is a very real risk that one or more creditors may petition for the debtor’s bankruptcy.

An IVA will last for a set time, usually 3 or 5 years. Assuming the debtor What happens at complies with the terms of the arrangement, upon completion of the IVA the end of an IVA? he/she will be fully discharged from all liabilities included within it. Any leftover debt that has not been repaid is written off. A record of the IVA will be removed from the Insolvency Register.

6 For the purposes of an IVA, preferential debts are unsecured debts which, by statute, are to be paid in priority to all other unsecured debts (wages due to employees is an example of a preferential debt) 7 A secured debt means that the creditor has the legal right to repossess the goods or property that the loan is secured against (a mortgage is an example of a secured debt)

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5 Regulation of IVA providers

5.1 IVA Protocol

The IVA Protocol (last revised in in August 2021) was created to make the IVA process quicker and simpler for insolvency practitioners. The Protocol is a voluntary agreement, which provides an agreed standard framework for dealing with straightforward consumer IVAs and applies to both IVA providers and creditors. In effect, the Protocol sets out voluntary guidelines.8

The IVA Protocol covers several areas, including:

• what the insolvency practitioner should do to check the debtor’s income and outgoings, • how any equity in the debtor’s home should be dealt with, • what to do when the debtor’s income and outgoings go up or down, • and what should happen if the debtor misses any payments.

Under the Protocol, the insolvency practitioner is also required to make sure that the debtor has received comprehensive information on different ways to deal with debt.

5.2 Recognised professional bodies

Individual insolvency practitioners (including those acting as the nominee or supervisor of an IVA) must be a member of a “Recognised Professional Body” (RPB) which also acts as their regulatory body. RPBs are responsible for ensuring that the quality of advice given by an insolvency practitioner is of an acceptable standard.

The Small Business, Enterprise and Employment Act 2015 (SBEEA 2015) introduced new statutory regulatory principles and objectives with which the RPBs must comply. The Secretary of State also has the power to create a single regulator of insolvency practitioners. This power will expire (if not used) on 30 September 2022.

Between November 2016 and November 2017, the Insolvency Service visited each RPB to assess how they carry out their monitoring and regulatory functions. It also undertook a themed review on how insolvency practitioners

8 Insolvency Service, “IVA Protocol”, revised 2 August 2021

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working as volume IVA providers are monitored and regulated. In recent years, there have been two major developments in the use of IVAs:

• First, Insolvency Service statistics show that the number of people seeking debt relief through an IVA has significantly increased from 49,400 in 2016 to over 59,000 in 2017. Prior to 2003 there were fewer than 10,000 annually.9 During the first quarter of 2021, there were 22,354 IVAs.10

• Secondly, the way IVAs are supervised has consolidated into a limited number of “volume providers” - ten providers accounting for over 80% of new IVAs registered in 2017.11

The corporate structure of some IVA providers means that the insolvency practitioner is often an employee, supervising many IVA cases. This represents a different way of working compared to traditional insolvency practice.12

On 26 September 2018, the Insolvency Service published a “Review of the monitoring and regulation of insolvency practitioners”, in which it detailed significant concerns about the practices and regulation of insolvency practitioners working for volume providers of IVAs. It made several recommendations. Subsequently, the Insolvency Service has made a commitment to continue its oversight activities, aware that some RPBs are exploring whether a voluntary code for IVA providers is feasible.

Further detailed information is provided in a separate briefing paper, “Insolvency Service review: volume providers of Individual Voluntary Arrangements (IVAs)”.

5.3 Complaints

If a debtor feels that their insolvency practitioner has failed to comply with any legal or regulatory requirements, or they are otherwise dissatisfied with the conduct of the insolvency practitioner during their IVA, they could raise this directly with them. If they remain dissatisfied, they could make a formal complaint to the insolvency practitioner’s authorising body (i.e., their RPB). They can do this via the Insolvency Service’s “Complaints Gateway” portal. A

9 Insolvency Service, “Review of the monitoring and regulation of insolvency practitioners”, 26 September 2018 10 Insolvency Service, “National Statistics – Commentary, Individual Insolvency Statistics January to March 2021”, 30 April 2021 11 Ibid 12 Ibid

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Government website provides guidance, “How to complain about an Insolvency Practitioner”.13

A debtor (or a creditor) might also challenge a decision made by the supervisor of an IVA through the court under section 263(3) of the Insolvency Act 1986. However, before incurring court costs, the debtor should first seek independent legal advice.

13 Insolvency Service, “Guidance – How to complain about an insolvency practitioner”, 24 September 2020

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6 Proc and cons of an IVA

IVAs do not suit everyone. On the one hand, an IVA can be flexible to suit the debtor’s needs, but it can be expensive and there are associated risks to consider.

6.1 Main advantages

For the debtor, an IVA can be an effective alternative to bankruptcy proceedings. The potential advantages include:

• IVA proposals are drawn up by the debtor and are entirely flexible to accommodate his/her personal circumstances. • An IVA gives the debtor a level of protection against impatient creditors (once in place, an IVA is binding on all creditors). • An IVA enables a sole trader or business partnership to continue to trade and generate income towards repayment of creditors. • The debtor does not suffer the restrictions imposed by bankruptcy, such as not being able to act as a director of a limited company or applying for personal credit. (In practice, credit may prove more difficult to obtain once an IVA is in place). • Through an IVA, a debtor can avoid the stigma of bankruptcy.

For the creditors, there are also benefits:

• The costs of administering an IVA are considerably lower than in bankruptcy, enabling a higher return to creditors. • Creditors often receive a better return than they would via bankruptcy proceedings. • IVA's operate as an insolvency procedure and creditors can, because of this, still reclaim tax and VAT relief as a bad debt.

6.2 Main disadvantages

Although an IVA can be flexible to suit the debtor’s needs, it can be expensive and there are associated risks. Most of the disadvantages associated with an IVA affect the debtor, for example:

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• The IVA is entered on a public Insolvency Register. • Where contributions from income are being made, an IVA is generally expected to last for a much longer period than bankruptcy (in practice, most IVAs are negotiated to last 3 to 5 years whereas bankruptcy usually only lasts 12 months). • The debtor’s savings and personal pension payments will usually be used to pay his/her creditors. • If the debtor owns a home, he/she may have to re-mortgage it. • If the debtor’s circumstances change, he/she could struggle to keep up with the IVA payments. If the creditors won't accept less, the IVA will fail. The debtor will still owe the creditors the full amount of what he/she owed at the start of the IVA (less whatever has been paid to them under the IVA). • Importantly, if the IVA fails, there is still a risk that the debtor may be made bankrupt.

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