Understanding debt & what they don't tell you!

IVAs, the truth revealed!
– How they work
– Things they do not tell you
– A last word on Equity release... The Big Gamble!

Bankruptcy Explained

IVAs, the truth revealed!

Defined as a 'Legally Binding Arrangement' between an indebted individual and their creditors. Often referred to as 'Little known Government Legislation', this simply refers to the fact that if the IVA is successful, assuming that 75% of your creditors by value agree to the proposal, the remaining 25% are legally bound by the terms of the IVA even if they voted against it in principle. This is fundamental because not all lenders support IVA's regardless of the value of the proposal. Northern Rock was the first lender to absolutely refuse all IVA applications.

How they work

The Internet and general media are full of advertisements from companies that advise on debt related matters. Although they appear to offer advice on a vast range of debt solutions, slick advertising techniques and subtle internet page links more often than not will guide you towards information specific to the IVA process. Upon making initial contact, a quick appraisal of your particular situation will take place and then  they will usually refer you to an Insolvency Practitioner (IP) who will assess your suitability for an IVA in more detail. 

An analysis of your income and expenditure will allow the IP to ascertain your monthly disposable income after all priority payments have been taken into consideration. This obviously excludes all unsecured creditors. If you own a property any equity will more than likely be placed into the IVA proposal and this is done in year 4 or 5 by way of remortgaging the property. Your creditors will usually require that the IVA returns a minimum of 40% of the total debt owed but there is no maximum. The more money that can be placed into the IVA the more likely it will be that your creditors will approve the proposal.

Usually an IVA will last for 5 years after which time your creditors are legally bound to wipe out any debt remaining.

Caution: If it sounds too good to be true...
It probably is!

IP's make vast amounts of money in fees and other charges which are indirectly paid by you through the IVA. On average this can be as much as £7000 over the duration of a typical IVA. Other irrecoverable expenses, such as a home visit which must be carried out on behalf of the IP in order to check your residential status and to the accuracy of the information contained in the proposal, can be as much as £1000. This has to be paid by you as an 'upfront fee' regardless of the outcome of your creditors decision to support or reject your proposal. In fact any monies paid to the IP prior to your 'Creditors Meeting' are usually non refundable if your proposal is unsuccessful.

Things that they do not tell you

"Your IP MUST make sure that each and every spare pound is paid into the IVA. They risk losing their license to practice if they do not. They are accountants after all, there to do a job and by nature they are thorough and unforgiving"

Your income and expenditure are reviewed by your IP quarterly. This means that every three months you will be subject to an in-depth analysis of your personal finances, including bank statements and other financial matters usually considered private.

Some people find this very intrusive and in some cases degrading. Any additional income such as overtime or an increase in benefits must be declared and up to 50% paid into the IVA. Although your IP (who is now your supervisor at this stage) can go back to your creditors from time to time if there is a small change in your circumstances, creditors are under no obligation to accept any variation to your IVA.

Personal finance can be very complicated and by its very nature is 'personal'. What you spend or do not spend your hard earned money on should remain your business. You will have to account for every item that you purchase and should your IP not agree with your accounting, additional money will have to be paid into the IVA fund. For most people this is just unacceptable.

Should you fall behind with repayments the very best and most likely event that will happen is that the length of the IVA will increase. In addition, any windfall, lottery win or inheritance will also be required as a contribution to the IVA.

This is why most lenders now insist that clients pursue other debt management options before an IVA can be considered even in principle. It is true to say that although for some an IVA can be an answer to their debt problems, for many thousands it has brought bitter disappointment and in some cases absolute TOTAL FINANCIAL RUIN.

As previously stated if you have equity in your property this will almost certainly form part of the proposal to your creditors. You will usually be required to remortgage your home at 85% loan to value and this takes place in year 4 or 5.

Remember that your IP or Supervisor is not trying to reduce your debts. They are legally obliged to return to your creditors the maximum amount possible from a formula of surplus income or surplus income + equity release (the difference between your outstanding mortgage and the current value of your home). In any event they act in an impartial manner.

1. Your new mortgage will be at sub-prime rates...
adding hundreds of pounds to your monthly mortgage for many years!

2. There is no guarantee that you will be able to remortgage...
resulting in you having to sell your house in order to satisfy your creditors!

3. Who would commit to taking out a big loan at unknown rates, some time in the future?
What happens if house prices fall or interest rates go through the roof... or both?

Bankruptcy is always knocking at your door if you cannot keep to the terms of the IVA!

This is why at 1-2-1 Debt Solutions we do not accept advertisements or referral fees from Insolvency Practitioners that specialise in IVA's. We will look at every option available to you and you may be surprised at just what can be done with our help.

Call us now!
0845 259 1364