What happens when a debtor wants to enter an IVA?

If you are owed money by a debtor who is struggling to repay their unsecured debt, and has sought professional help to move forward, in some circumstances an Individual Voluntary Arrangement (IVA) will be the most appropriate method for them to do so.

There are so many unforeseen circumstances that can create unmanageable debt – redundancy, divorce and ill-health, for example – that IVAs have become a popular and relatively common way for debtors to start afresh financially.

What is an IVA?

An IVA is a legally binding agreement between a debtor and their unsecured creditors that allows repayment of a proportion of the debt at an affordable rate. Repayment also occurs over a longer period of time than the original contractual arrangement. 

As the name suggests, an IVA can only be entered into by an individual (such as a self-employed sole trader) rather than a company. The equivalent process for a limited company is a Company Voluntary Arrangement (CVA).

IVAs can offer a way to recoup some of the money you are owed, and may be a better option than making your debtor bankrupt. Here are five tips to help you decide whether to vote in favour of an IVA, if a proposal is presented to you by one of your debtors.

1.     Treating creditors equitably

One of the main prerequisites of an IVA is that all creditors are treated fairly. If you feel you are not being treated equitably, you should contact the Nominee (the licensed insolvency practitioner appointed to act in the process) to raise your concerns. You could also get in touch with other creditors to find out if they feel the same way.

It is commonly the case that unsecured creditors receive little in the way of a dividend following bankruptcy procedures, so you may want to avoid making your debtor bankrupt. The Nominee may feel able to adjust the proposal if you point out your concerns.

2.     Has full disclosure been made by your debtor?

Debtors are obliged to disclose their full financial situation so the insolvency practitioner (IP) appointed to make the IVA proposal can ensure all creditors receive the maximum return possible. If you have reason to believe the debtor is withholding information that could alter the proposal if it was disclosed, you should inform the Nominee.

They may own a second property that has not been included, for example, or perhaps you have noticed other irregularities that could compromise the amount of money you receive back. You are entitled to seek advice from your own IP or solicitor before you decide how to vote – this  could clarify the situation for you, and make the decision easier.

3.     Have IVA procedures been followed?

Licensed insolvency practitioners are legally bound to follow the statutory IVA process, but it is possible that human error could result in a significant issue being overlooked. For this reason, it would be worthwhile seeking help from an IP to check that proper process has been followed, and that your interests are being suitably recognised.

If the process has not been correctly followed, or the Nominee has been deliberately misled by your debtor, you can challenge the proposal. You will need to act within set time limits, however, and ensure you can back up your challenge with reliable supporting documentary evidence.

4.     Keep an eye on stated debt values

The values of each debt included within the IVA proposal are an important factor when it comes to voting. If 75% of creditors vote in favour, the proposal will go through even if you are part of the 25% who voted against it.

In general terms, for every pound of debt you are owed, you are entitled to one vote. So if you feel that other creditors’ debt levels are falsely inflated, you should voice your concerns to the Nominee. If any debt is disputed, the Nominee also has the power to place a value on that debt after due deliberation and background investigations have taken place.

5.     Are there any better alternatives to an IVA?

It is advisable to consider whether other debt relief procedures, such as a debt relief order (DRO) or debt management plan (DMP), are more appropriate for your debtor’s circumstances, and if they could provide you and other creditors with a better return.

Seeking advice from another insolvency practitioner is useful in this respect, and ensures your vote is used to best effect. It is also important to factor in the costs of having to chase your debt again if you do not accept the proposal – these can be significant when you consider the drain on your time and resources.

Begbies Traynor specialises in insolvency, and can offer more tailored information on what to do on receipt of an IVA proposal. With over 70 offices around the country, you can arrange a free same-day consultation near to your location.