IVAs could help borrowers and lenders alike

In a candid interview with the Guardian newspaper, Chancellor Alistair Darling unexpectedly admitted that Britain was ‘facing “arguably the worst” economic downturn in 60 years’ – and that he ‘had no idea how serious the credit crunch would become’.

Given the economic troubles already upon us, the thought of an even gloomier future probably comes as a shock to borrowers whose financial commitments are already stretching their monthly budget to the limit. If their monthly unsecured debt payments are already (or even close to) exceeding their disposable income, there’s a good chance they need to address their debts through decisive action.

For people with substantial unsecured debts, an IVA (Individual Voluntary Arrangement) could well be an appropriate solution, says a spokesperson for Think Money. “The principle of an IVA is straightforward: if the individual and their creditors can agree on terms, they will both commit to a (normally) five-year agreement. The borrower can look forward to a write-off of any outstanding debt at the end of that term, as long as they make the requisite number of monthly payments.”

A legally binding debt solution, an IVA benefits both borrowers and lenders. From the borrower’s perspective, it delivers three principal advantages: lower monthly payments, a cessation of legal action (including threats of bankruptcy), and a write-off of the debt they can’t afford to repay. Lenders, meanwhile, receive payments totalling more than they would receive should the borrower go bankrupt.

“The individual’s monthly payments are carefully calculated by a licensed professional known as an Insolvency Practitioner (IP),” the spokesperson continues. “Before the IVA can start, the IP will work with the individual to gain a complete picture of their financial situation, from assets and liabilities to income and expenditure.

“If they believe an IVA is the best way forward, the IP will draw up an IVA proposal, detailing exactly how much the individual needs for essentials (mortgage / rent, fuel, food, etc.) each month. In other words, the IVA proposal tells lenders exactly how much they can expect to receive – the entirety of the individual’s remaining monthly income.”

The next step is the creditors’ meeting, at which the creditors vote on whether or not to accept the IVA proposal. If 75% of the creditors (by debt value) approve, the IVA can go ahead. If not, they can either reject it or ask for changes to the proposal.

“This flexibility is a key part of the IVA. The lenders can request changes before they commit themselves to the IVA, and the borrower can request a ‘variation’ on the IVA if their circumstances change significantly while it’s running. Neither party is obliged to accept, but it’s important that that option is there – in many cases, agreeing to a few changes can be what brings the IVA to a satisfactory conclusion, benefiting everyone involved.

“It’s important to remember that no-one will qualify for an IVA unless their monthly debt repayments exceed their disposable income. In other words, they’ll already have spent some time dedicating all their disposable income to their debts. Once on the IVA, they’ll still be doing this, but there’s an important psychological difference: each payment they make will take them one step nearer to the end of the IVA, and to the write-off of their outstanding debt.”