Published in Debt Advice Features on Thursday, April 26 2007

Firstly what is equity? Equity is any money left over once you have sold or cashed in an asset. So for example if you sell your property, the equity is what is left over after you have paid your mortgage off. If you cash in a pension it is what is left after all the fees and charges have been taken. In certain cases you will have to release equity from any assets you own with the exception of perhaps your vehicle. 

This may includes properties in this country and abroad, unapproved pensions and life assurance polices, caravans and motor homes, and if your vehicle is deemed excessive to need, for example a £30000 Porsche, you may be asked to exchange it for a more suitable vehicle and put any equity into your Individual Voluntary Arrangement.

If you rent your property obviously you will not be asked to release any money from your property as you do not own it. However if you are a home owner, it will be examined how much your property is worth and how much you owe against it in mortgages and secured loans and possible charging orders. A charging order is when a creditor has applied to a court to get their debt secured against your home. This usually only happens if you stop paying the debt, so for example you have a credit card with Barclaycard unsecured, and you stop paying, they can find out if you have equity in your property and if so apply to a court to get the debt secured against your home. This secures them a return should you ever sell the property. Therefore this would also reduce the amount of equity in your property. Usually equity is released in the fourth year of your Individual Voluntary Arrangement, and so it may be calculated how much equity you will have in your home after the four years has passed. This is because it may not be worth your while re-mortgaging at the beginning, but after making four years worth of payments there may be a sufficient amount to release. When your Individual Voluntary Arrangement is put forward to your creditors, this may sway their decision to accept it or not as they will consider it more favourable obviously if they are getting more money back.

However if you are in negative equity with your property, and at no point during the IVA will you have any equity, you will not be asked to release any as obviously there is nothing to release.

If you have a large amount of equity in your property, that is more than you actually owe, an Individual Voluntary Arrangement is no longer the favourable option for you. This is primarily because when the Individual Voluntary Arrangement is put forward to your creditors, in the paperwork it is directly compared to bankruptcy. This means they will look at how much money they could get back in an Individual Voluntary Arrangement and how much they will get back in bankruptcy. If you have more equity in your home than you owe in debts, obviously the creditors will get more back by claiming your home in bankruptcy, and to avoid this you should go for an Individual Voluntary Arrangement. It may be better for you to examine remortgaging for example if you are in this situation or if this is simply not an option, you may need to sell your property and release the funds that way.

If you jointly own your home with someone else, and this other person is not doing the Individual Voluntary Arrangement (you can do joint IVA’s) then only your proportion of the equity in the home only will be considered, under normal circumstances this is usually half.

Equity is released as mentioned previously in the fourth year normally. This is usually done by way of remortgage. So for example your home is worth£100000 and you have a mortgage of £60000, you would remortgage usually up to 85% of the value, so £85000. The percentage of equity to be release would be set down in your contract or proposal at the beginning of the Individual Voluntary Arrangement. It isn’t normally 100% so you can be secure in the knowledge you don’t lose all the equity.

You may have a problem with this equity release, but it is just part of the terms of the Individual Voluntary Arrangement, and if you don’t like it unfortunately pretty much the only other option is not to do an Individual Voluntary Arrangement. However this usually means you go down a route such as debt management and you should be aware that the creditors are becoming wise to this and are going for far more charging orders, so you end up losing some of the equity in your home any way without the added benefit and protection of the Individual Voluntary Arrangement in getting some debt written off.

These rules are pretty much the same for properties abroad, but you should just be honest with your Insolvency Practitioner about such properties so they can advise on them. The Insolvency Practitioner is the person who sets up and runs your IVA.

Obviously with unapproved pensions and life assurance policies, again you would just need to be honest with your insolvency practitioner so they can decide if they need to include them or not. And again with vehicles, usually vehicles are protected under the IVA, but if there was a problem with a vehicle it would be raised at the beginning before your Individual Voluntary Arrangement was made official. This could be something like swapping it for a slightly cheaper vehicle for example.

Other assets can include caravans and such vehicles and even horses and ponies! Again you would need to reveal these as it would be fraudulent if you didn’t, and your insolvency practitioner would be able to decide what to do with them.