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Understanding an IVA proposal
OR
The secrets the IVA factories don’t want you to know !
When it finally dawns on you that you really must do something about your debt problem you have no idea what to do or which way to turn, why would you? You have never experienced a problem like this before and hopefully you never will again. Most probably you feel uncomfortable turning to family or friends for advice.
We all know how to deal with tooth ache or what to do if we don’t feel well. If you want to sell your house or need advice about, for example, a divorce we know who to turn to. But debt? Where can you go? You have probably already spent a long time struggling with the problem, making payments, dealing with creditors, avoiding telephone calls and not opening your post. Unfortunately there are no signposts saying “get help over there!”
Generally speaking people Google something like “debt help” or they see and ad on the T.V. or in the press and end up speaking to one of the large IVA companies who paint a picture of how they can help, how they can provide a cure for all of your problems, “one affordable monthly payment” is a favourite or “using a little known piece of Government legislation” and what seems like the most wonderful solution of all “we can write off up to 70% of your debt” do any or all of those phrases sound familiar?.
The IVA company will appear to be the just the right people for you, friendly, helpful and understanding when you make your cry for help. You probably feel so secure with your new found friend that you are lulled into a false sense of security and blindly accept what they say without asking a few probing questions. For their part they won’t tell you the little secrets they would prefer you not to know.
Perhaps reading this now you may question some of the information you were given when you decided to go for an IVA. Hopefully you haven’t made your decision yet and this will come as a timely warning.
Lets not kid ourselves here, whilst you most probably borrowed money in the firm belief that you could repay it, at some point in time your situation changed and you are now unable to do so. The reality is that you are almost certainly looking for the cheapest and quickest solution to the problem. It’s a matter of human nature, very few people would say that they want the longest, hardest solution to anything and that includes a solution to their debts.
The first thing to understand is that, despite the way it may appear, the people in the IVA company are not working for you. Incredible isn’t it? You called them for help, they sound so friendly, you are even going to pay them a fee for their service and yet they will not be working for you!
You see they are Insolvency Practitioners, they work under licence.They have to get every penny they can from you to go to the very people you have been trying to get away from, the creditors who have been phoning endlessly, sending you threatening letters, making your life hell.
Almost certainly you will never actually speak to the Insolvency Practitioner in person, the people you speak to at the beginning will be professional sales people, employed for their powers of persuasion which is their skill as a salesman.
They will have been trained in the basics of insolvency but their job is to convince you that using the services of their particular company is right for you. They will be paid a commission for their efforts and the company will keep the rest.
Can you imagine how this would work if you were buying a new car or having some improvements done to your home? Would you even consider walking into a garage and taking the salesman’s word at face value without checking what he is saying or getting a second opinion from another builder? No of course you wouldn’t.
Yet every day people telephone an IVA factory and just simply accept what the nice sales person says. They wait for the paperwork to arrive, sign it and start paying. Normally most people receive their IVA document, take a quick glance through the thick wad of pages containing confusing legal jargon, turn to the back page sign it and return it without understanding the contents convinced that it is their only hope of saving themselves.
An Individual Voluntary Arrangement is a court ratified and therefore legally binding document with far reaching consequences, and yet they have no idea what they are really committing themselves to. Strange isn’t it that a perfectly rational, intelligent adult could be lulled so far into a false sense of security that they simply sign away at least five years of their life and every single penny of their disposable income to a person who is working for somebody else, namely the creditors.
Allow me to start making things a little clearer, I will take you through an IVA proposal and point out a few of the things you should know. If you have a proposal document to hand why not get it out and we can go through it step by step. There is no standard layout but most are similar and you will easily find the points being made.
First of all let’s look at the front page. At the top it should mention the court and it will say
In the matter of the insolvency act of 1986 (it sometimes also says 2000). Right from the start this document contains important information; it tells you that this document is legally binding because it is bring dealt with by your local court and that it identifies that you are insolvent.
It will then go on to say In the matter of and then your name and address, it will usually give some information about the “nominee” that will be the Insolvency Practitioner.
On the next page will be a general description of the situation. It is here that we often find words being put into the debtors mouth.
The page will start something like this;
1 INTRODUCTION
It will then go on to list items
1.1
1.2
1.3 etc
In one of these items it will say something like “In such circumstances there are two alternatives....an IVA or petition for my own bankruptcy... this is the place where you accept on paper that you are insolvent and that these are the two options open to you to remedy the situation namely bankruptcy and an IVA. Make no mistake here these two solutions are almost one and the same. There are a few differences of course but you have marked yourself as “insolvent” whichever solution you choose and by definition you are happy with that of course, aren’t you?.
It may give some reason why you have chosen an IVA for example you wish to avoid the stigma of bankruptcy. Do you wish to avoid the stigma of bankruptcy? You may quite rightly be saying “what stigma?” this is two thousand and something not the middle of the 1900’s Attitudes have changed and yet IP’s still use the stigma of bankruptcy as an excuse to shoehorn people into a nice profitable fee earner like an IVA.
These paragraphs will also include something like “I believe that this is the best proposal for my creditor s...” p; Are you really worried about what is best for your creditors or should you be more concerned about what is best for yourself and your family?
Section 2 of the proposal will detail your personal history and provide an explanation of how your debts were accrued.
Typically it will also set out the reasons why you would expect your creditors to accept the proposal and will usually include something such as ......” I have considered bankruptcy but it is likely that my creditors would not receive the level of dividend available in an IVA”.
This is a significant piece of information and one which is fundamental to your future. What is actually being said here is that you will be happy to pay more money into an IVA than anyone would expect you to pay in a bankruptcy. This is for the benefit of your creditors.
Is that true? Did you start this process with the expectation of paying more money? Did you really expect to choose the most expensive solution and the one which would most benefit the very people you have come to view as your adversary?
Section 3 is usually a summary of your assets and it is at this point that we can definitively say that if you have no assets then it is likely that the IVA is the wrong solution for you. Even if you own a house but it is in negative equity then you do not have an “asset”. Was this fully explained to you by the IVA factory sales person? Did you clearly understand the enormous importance of this?
Further on in this or another section it will describe the “Supervisor” which is almost always the same person as the Nominee. In other words the Insolvency Practitioner. It is convenient isn’t it that the person making the proposal will also give themselves the job of making sure it is driven through to the end and therefore earn two fees.
Perhaps you are wondering if you have any say in this arrangement. Well unfortunately you do not. You have no right to voice your opinion regardless of the fact that it is you who started the whole process and it is you who will pay for it and it is your future it will shape you are by now a mere spectator banished to the sidelines.
There are in the following pages a long list of Do’s and Don’ts and descriptions about what will happen if you are unable to maintain the payments. It will also talk about what will happen if you have an “after acquired asset” This will be something like a lottery win or an inheritance. Needless to say you will most probably have to release this to the supervisor for the benefit of your creditors.
There is only one thing more to discuss in this section and that is what will happen in the future if you are a homeowner. In year four you will be obliged to get a full market valuation on your house. That is to say it will be valued at the highest price possible. On that basis you will then be required to get a remortgage to release any equity to you creditors. All of this on top of the money you have already paid and will continue to do so for another year.
At the time of writing there are very few mortgages available to people with good credit files, let alone people whose credit file is marked “insolvent”. Even if a mortgage were available to you it would not be at the minimum 85% loan to value required by the IVA and in any case it is more than likely that previous remortgages have seen you take your loan to value way above this.
There is one last barrier preventing you from getting a remortgage at this time and that is the laws the Government have put in place. The Financial Services Authority is the regulating body for the mortgage industry and they stipulate that a mortgage should be affordable. You have already committed yourself to paying every penny of your disposable income into your IVA contributions so in that case you would have no money available to pay a higher monthly mortgage payment.
If you can’t get a remortgage you may well have to sell your home to raise the cash, was that part of the plan?
If you are lucky and there is only a small amount of equity in your home the creditors may insist that the term of the IVA be extended, usually for another year making it a 6 year sentence.
One of the most important and telling sections in the IVA proposal are the financial breakdown pages. They are sometimes referred to as either the Bankruptcy/IVA comparison, Estimated Outcome or Realisation.
It is here in black and white that you will see exactly how much more money your IVA is going to cost you. It is here that it will describe the “estimated realisation” or “estimated sum available” in a bankruptcy and the IVA. Remember the Nominee can only propose the IVA if the money you are going to pay in the IVA is greater than in a bankruptcy. That’s his job, to get as much for the creditors as he can and you are the one who is going to provide it to them. Is that what you wanted at the beginning?
It is here too that the IP is forced to show his hand; listed in the costs will be the nominee and supervisors fees. This is the money you agree to pay them. Let me tell you that from experience we know that your creditors will see no money certainly for the first year and most probably for nearly all of the second year too. Where does this money go? The answer is it all gets swallowed up in costs and Insolvency Practitioners fees. This is money that will never go to your creditors, did they make that clear to you at the beginning?
If you have answered No to any of the questions posed here then I suggest that you look very closely at the arrangement you are thinking of getting into and if you are already in an IVA you should be thinking very carefully about whether it has benefited you in any way.
Entering into an IVA is a serious business, it will see your credit file marked “insolvent” for at least the next five years. You will pay 100% of your disposable income into your IVA contributions, the first two years (or a large part of it) worth of which will never get to your creditors.
There is an alternative which will see your credit file marked as “insolvent” for only one year and have you paying between 50% and 70% of your disposable income for only three years, it may be that you will not be asked to pay anything at all. Do the maths for yourself, which is cheaper and quicker; isn’t that the solution you are looking for?
Now ask yourself some important questions; did you know any of this when you started reading this? Did the IVA Company tell you any of this or did they simply say that an IVA was the solution for you? Do you trust the IVA Company now you know their secrets? What have you actually got from your IVA?
According to the rules which govern the way the Insolvency Practitioners work and the way your IVA should be, your IVA must be FIT, FAIR & FEASABLE.
You should have had a face to face meeting with you IP or an experienced member of his staff, were you offered such a meeting? Did a face to face meeting ever take place?
If you think about your IVA now do you think it is fit? Is it right? In your opinion is your IVA fair? Do you think you have been treated fairly and do you think both you and your creditors are getting an equally fair deal?
Is your IVA feasable? Do you think that the way you are living, trying to make your payments is a realistic life? Is it feasable for you to maintian this way of life foir the full five years?
Perhaps the most important question of all is;
ARE YOU READY TO DO SOMETHING ABOUT THIS?
IVA Watchdog
2 Landsdowne Crescent
Bournemouth
Dorset
BH1 1SA
01202 636070