IVAs during coronavirus: what you need to know
Debt has a horrible way of spoiling everything. It can affect our health, our relationships and any sense of hope for the future. It spirals out of control so quickly and with little notice.
We do our best to make payments, but we then need to reuse our credit facilities simply to live. It can be a never-ending circle.
Insolvency means there’s no reasonable way for a debtor to repay their unsecured debts (personal loans, overdrafts, credit/store cards, catalogues, credit agreements and certain arrears and overpayments).
Personal insolvencies in 2019 were at their highest level since 2010 at 122,181. This is a 6% increase on 2018 figures and they have increased year-on-year.
Given that these debt solutions remain on a person’s credit file and an insolvency register for six years – well over half a million people are already affected. And it’s about to get a whole lot worse due to coronavirus.
Insolvencies – difference between IVA, bankruptcy and Debt Relief Order
Of the insolvency solutions available, Individual Voluntary Arrangements (IVAs) are the most popular at 60% of the total.
They differ from bankruptcy in that certain assets are legally protected (e.g. property, vehicle) and is likely to be more discreet as employers or landlords are unlikely to be aware.
An IVA is a legally binding plan with your creditors to help pay off what you can of your debts over a set period of time.
It involves repaying one affordable monthly payment to cover all the unsecured debts. The affordable amount is calculated by examining income and outgoings and presented to the creditors by a proposal drawn up by a licenced Insolvency Practitioner.
Assuming the IVA proposal is accepted by creditors, then for a fixed period (usually five years), no interest can be added, no action taken nor contact made by creditors.
At the end of the IVA – all remaining debt is written off. At this point, or soon after, an individual’s credit rating, which has been severely affected, can be rebuilt. Those in debt live to fight again – with a debt free future. Many go on to get mortgages, vehicles on finance as they prove they can be trusted with credit again.
Other debt solutions in England, Wales and Northern Ireland (Scotland has a slightly different debt option), include:
- Bankruptcy – usually regarded as a last resort, assets can be lost and if affordable – payments can last for three years
- Debt Relief Orders – bankruptcy for those with debts of less than £20,000 and no assets or disposable income
- Debt Management Plans – informal repayment arrangements where the whole debt is repaid but with one affordable payment.
Government help for those in IVAs and those considering IVAs
The Covid-19 pandemic will have a long-term negative impact on the UK’s economy. For individuals, this means a decrease in income and, possibly, an increase in expenditure, making the situation for those in financial difficulty worse.
As a result, the government through the Insolvency Service (oversees and regulates the insolvency industry), has issued new guidelines to help those in IVAs and those considering IVAs.
It has announced financial help for all individuals furloughed and quicker access to benefits; creditors have also helped by allowing payment holidays and not following through on legal action to recover unpaid debts for the time being.
For those with IVAs and affected financially by the pandemic, immediate relief is available by way of a three-month payment holiday and/or a 25% reduction in the IVA payment level.
Crucially, this can now be done without recourse to a new meeting of creditors to approve the holiday/reduction in payment level which is usually the case and takes time and money to set up.
The Insolvency Practitioner is now authorised to provide this help under his or her own initiative.
With so much uncertainty in the present and future for many people it was feared that government-assisted income might not count given its temporary nature. The Insolvency Service has suggested that it is permissible to include this income although clarification will still be required of plans to continue with IVA payments once the government help ceases.
For new IVA applicants, evidence of income is essential. List all your debts, plus household income and non-debt expenditure. This can take the form of payslips, tax returns (for the self-employed) or bank statements showing benefits, pensions etc.
A 20-minute phone call with a debt advisor or an IVA company should help establish whether an IVA is an option or not.
Most IVA companies will advise and set up an IVA with no costs involved at all. Fees are then paid from within the monthly payments that are made into the IVA and not in addition to them.
Government help and creditor support plus possible help relating to mortgage and rent payments means there is immediate breathing space for the worried debtor. Given the severity of the pandemic, it’s a small comfort, but assistance and creditor forbearance does at least buy us a little time.
However – the debts are not going to go away. Sooner rather than later, facts need to be faced and plans made. Given that we know the economy will take a massive hit in the aftermath of the virus, individual debtors will need to be aware of all options available to them from the formal insolvency solutions to the informal repayment plans. The worst thing we can do is nothing.
In times of financial crisis, it’s reassuring to know there are options available to those in serious debt. Challenging and sometimes painful though an IVA may be, most people welcome the liberation that a structured, affordable plan with a definite end point brings. A sense of light at the end of the tunnel, of hope and new starts.
Keith White is accounts director at IVA.com and author of “IVA’s – a Survival Guide”