Published in Debt Advice Features on Wednesday, January 24 2007

The answer is no-one other than your creditors can write off any money you owe to them, a company however may arrange for the creditors to write off the debt through an Individual Voluntary Arrangement.

The idea behind the IVA was introduced as an alternative to bankruptcy, its designed for people who can pay something back towards their debts and in return the creditors can write off a maximum of 75% of the debt they are owed subject to some restrictions.

Creditors are generally in a mutual agreement that they would accept a minimum of 25% or £0.25p in every pound back for debt they are owed through an IVA; however the majority of Individual Voluntary Arrangements that are being proposed are averaging 35% back to creditors. The percentage a creditor accepts back is called “Dividend”

The percentage of how much the creditors will write should not be used as a selling tool as it can be perceived as mis-leading, although it isnt intended to be mis-leading, it is a guideline to what the creditors can do for the individual if they enter into an IVA.

The underlying factor in every IVA is that the creditors have the deciding vote, they decide if the IVA is to go ahead or not, they make the rules and these rules can change on monthly basis and often do.

What I mean is; although the minimum percentage a creditor accepts back is 25% in every pound they are owed, the rules can change that the creditors may only accept 40% back in every pound, then the month after they may only accept 30% back, now there are certain creditors who always change the amount they will accept back on a monthly basis, every IVA case is assessed on an individual basis, there is no written rule that you may not go into an IVA because your creditors will not accept.

The IVA is administered and monitored by a licensed Insolvency Practitioner; their fees have got to be taken into account, when an IVA is proposed, e.g.

If a person owes £30,000 and they can afford £250 per month, they would pay this over 60 months giving total contributions of £15,000 the total contributions works out as 50% dividend, however as already mentioned the Insolvency Practitioners fees have got to be taken into account, these are broken down into 2 fees known as: The Nominee and Supervisor fees, lets say these fees are £6000 over the 5 years:

EXAMPLE

Total Contributions of 250 x 60 months = £15000
IPs Fees = £6000

Deduct the IPs fees from the total contributions leaves £9000 to creditors, this money would be paid to the creditors, giving a creditor dividend of 30% in the pound

This would meet and exceed the minimum creditor dividend for an IVA, however one creditors criteria could be that they want 35% back over the term, which means that one creditor would reject the IVA. If that creditor is owed more than 25% of the overall £30000 (£7500) then this creditor would have the deciding vote and the IVA would be rejected, however the if debt to this creditor is less than the £7500 then the remaining creditors would accept and overrule the creditor whos minimum dividend was 35% which means the IVA would be accepted.

The example above is quite complicated and long winded, you should never really get to this stage and although the creditors have the control, a good advice company and Insolvency Practitioner would know what the creditors require back and if they could reach the criteria needed to get the IVA accepted at the meeting of creditors, they would ensure that you have enough money to live off over the 5 years while you meet the expected amount by the creditors.

I believe the IVA should be re-thought, there should be a minimum acceptance percentage, however it should be that a person looking to enter into an IVA should agree to pay back as much as they can over the term of the IVA and the creditors would write off the remainder, even if it is the case that they can pay off all of the debt and be guaranteed to be debt free through the IVA then so be it, some would argue that a debt management plan would more suitable, but there are no guarantees that they would be debt free within 5 years, due to the informality of it.

Selling an IVA on the basis that your creditors would write off 75% of the debt can seem a false statement as the Insolvency Practitioners fees have got to be taken into account, one good thing about the IVA is that you would be debt free in 5 years through an IVA. I know that if I had debt of £30,000 and I was told that I could pay back £30,000 over the 5 years, without interest and charges knowing that I will be debt free, I would go for an Individual Voluntary Arrangement, whether I had to pay the Insolvency Practitioners fees or not. Granted if that was the case then I could pay back all my debt over 5 years in debt management plan, but the reality of it is that I wouldn’t, interest and charges would be added so in reality it would probably take me 10, 11 or maybe 20 years.

If you want to be debt free you have to expect to pay as much as you can, it is the right thing to do, the money was borrowed with a view to being paid back, we all know who has been in a position that there seems to be no hope of ever being debt free, or in trouble and behind with repayments that the easiest way could be bankruptcy, but do you not think that we could all benefit from solutions like an IVA regardless of the amount of debt you have and how much you can afford to pay each month, if you are paying as much as you can is this not the same as paying ever penny you earn towards your debts each month..