Mortgage default under IVA ?

[kat66]

Hi,
I have a question... What happens if during an IVA your mortgage payments go into arrears although the IVA payments are being made... and the mortgage company starts repossesion proceedings. Would this contravene the IVA and also what would happen if the house got repossesed....would the term of the IVA payments be extended to pay off the amount required from the equity release ? Could a secured creditor then petition for bankruptcy or take you to court? if so what would happen with the IVA?

Sorry if a bit complicated,

Thank you very much

[liberta]

Good morning.

The first thing I would say is that if you are having difficulties paying your mortgage then you should speak to the Supervisor of your IVA. If your circumstances have changed, he may be able to return to your creditors and ask them to accept reduced contributions. You should be able to afford both the payments to your mortgage and the payments to your IVA.

If for some reason your mortgage payments do go into arrears and the property is repossessed, it does not necessarily mean that your IVA will fail, but there will be various points to consider.

If there is negative equity, then the mortgage company is bound by the terms of the IVA and cannot chase you for payment outside of it. They could not take you to court or bankrupt you. However due to the additional claim in the IVA, the anticipated dividend to your creditors will change. If your proposals were accepted by your creditors subject to them receiving a minimum dividend, then you probably will not achieve this anymore. You will need to ask the Supervisor of your IVA to return to your creditors and ask them to agree to a reduced dividend.

If the house has been repossessed then there can be no equity required in respect of the equity release clause in your proposals. So no the term of the IVA would not need to be extended to cover the amount required. However please note my comment about the minimum dividend requirement above.

The Supervisor of your IVA will need to know about your change of address and will want to conduct an income and expenditure review taking into account your new household expenses.

I hope that this answers your concerns on the "what if factor". However I cannot stress strongly enough - talk to the Supervisor of your IVA if you are having problems. You should not get into such a position if you tell him you are struggling with the payments to your mortgage or IVA as soon as you realise you are having problems

[kat66]

Hello Elizabeth,

thank you so much for your detailed answer, I am a little clearer now. May I ask you a couple of other questions please ?

Am I correct in understanding then that under the terms of an IVA nobody can make you bankrupt other than the supervisor if you default on the IVA? I thought it was only the unsecured creditors that couldnt petition for bankruptcy, not secured creditors?

What about if a secured loan goes into default? can they petition for repossession?

What would happen at a court ....would the court tell them that I was in an IVA and then what would happen? Would this look bad on my IVA even if I was up to date with the monthly payments and could potentially increase the payments to make up for the shortfall on the dividend from the equity release.

Sorry for all these questions I just need to be clear about all the possibilities

I am very grateful for your help

Regards

[MelanieGiles]

I do not actually share Elizabeth's view that the mortgage shortfall would be covered under the terms of the IVA. This would depend upon whether it could be successfully argued that the creditor was bound by the IVA, as these types of arrangement do not affect the rights of secured creditors - hence their right to commence and proceed with possession proceedings.

There is an argument that the mortgage company might be bound under the terms of the arrangement, if they were in a position to vote at the date of the creditors meeting had they been given the opportunity to do so if they had been properly circulated. If their security was covered at the time of the creditors meeting, then this is unlikely, and I believe that any shortfall claim would be outside of the IVA.

I, of course, could be wrong - and it might be better if you took proper legal advice on this point to be sure.

[liberta]

Hi

An IVA does not affect a secured creditor's right over their security. So if you default on the mortgage or secured loan payments, the mortgage company or secured creditor can repossess the property.

The shortfall in the mortgage or secured loan is however covered under the terms of the IVA just as it would be in bankruptcy. If that shortfall is crystalised (i.e. the property was repossessed and the actual amount of the shortfall became unsecured) during the period of the IVA, the now unsecured creditor becomes bound by terms of the IVA and would not be able to take action against you. If the shortfall is crystalised after the IVA had finished the now unsecured creditor would be entitled to chase you for the shortfall but only to the extent of the dividend they would have received from the IVA (i.e. if your creditors had been given 30p in the £ from your IVA they can chase you for 30% of the shorfall).

Beware however, a judgement of a recent court case ruled that the costs of repossesion and sale of the property may not be covered by the IVA as the debt relating to these costs arguably arose after the IVA was approved. This case is currently under appeal and is due to be reheard early next month.
A mortgage company is entitled to vote at the date of the creditors meeting for the estimated shortfall on their security. They rarely do however but that is their choice and they will still be bound by the IVA.

Again I would stress do not get into this position, if you are having problems, speak to the Supervisor of your IVA

[David Mond]

Liz,

I don't think you are right. If at the time of the start of the original IVA there was no shortfall in value and there was a surplus to go into the arrangement then:

1. If currently there is no surplus then it depends on the terms of the IVA as to what would happen.

2. The shortfall to the secured lender(s) is a post IVA debt and does not fall into the existing arrangement.

3. The secured lender could be asked to join into the existing IVA which might have to be extended if any dividend was fixed originally so as to extend the IVA for such period necessary to give a similar or smaller dividend - might require a variation meeting.

4. The secured lender could force bankruptcy - but it would (in my opinion) not necessarily be granted as the granting of a bankruptcy petition is discretionery by the Bankruptcy Judge and if the circumstances of the case were such that it would jeopodise the existing arrangement which has been running smoothly then I would expect more sympathy with you rather than the secured lender.

Would be interested in hearing any other views on this.

[MelanieGiles]

I agree with you David - and will be running this by my own lawyer tomorrow, as we must be sure we are giving the right advice as professionals on this forum.

As I implied in my earlier post, I share your view that this would be treated as a post-IVA debt, but it will be interesting to find out the right answer.

[David Mond]

Thanks Melanie - let me know what your lawyer says

[MelanieGiles]

I have had a lengthy chat this morning - and they are going to look into this further.

It is very topical at the moment, and something which would be good for all IPs to share. I will certainly be changing the wording of my proposals if it is deemed that these sort of claims are validly caught by the IVA.

[liberta]

Good afternoon

I have always understood that in an IVA a shortfall on a mortgage and secured loan was treated in the same way that it was in bankruptcy i.e. that it was an obligation entered into prior to commencement. To my mind it therefore stands to reason that if the creditors were notified of the meeting, they were entitled to vote and, are therefore bound by the arrangement. Please also note the arguements in the court case I referred to; Cornelius v Casson [2008] BPIR 504, where a distinction was made between the mortgage being the pre IVA agreement and the costs which were incurred by the mortgagee subsequent to the IVA.

However I look forward to hearing from Melanie what her lawyers say. I am happy to eat my words and appologise profusely to all concerned if I am wrong.

Kat66 back to your second posting and further questions which we have all overlooked.

Under the terms of an IVA no creditor that is bound by the IVA can make you bankrupt. However a creditor who is not bound by the arrangement can petition for your bankruptcy as can the Supervisor of your IVA if you are in default.

If your propety is reposessed then the mortgage company and/or the secured loan creditor will become unsecured for any shortfall following the sale of the property.

As you are no doubt aware your question has caused us a bit of debate and so I would say that the jury is out as to whether or not your mortgage company and secured loan creditors are bound by the IVA. Would you be able to tell us whether there was any equity in the property when your IVA was approved - that is the value of the property less the mortgage and secured loan.

If a secured loan goes into default, that creditor can reposess the property just as can the mortgagee.

[kat66]

Elizabeth,
thank you for your very comprehensive reply.
In answer to your question, NO there was no equity in the property when the IVA was approved and I have since had confirmed that ALL creditors ie both unsecured and secured were advised of the IVA at time of proposal.
Does this help clarify? And can you explain how different it would be if there was equity at time of proposal

I very much look forward to your reply and the other experts. You are all superb , thank you so much

[David Mond]

As there was no equity at the time of your entering your IVA the shortfall is within your IVA. If there was equity at the time of your IVA then usually 85% (subject to 85% LTV)of your equity interest would be paid into your arrangement (usually in the 54th month) (but see what proposal stated) by either re-mortgage or sale.

Now if during the period of any arrangement the property value declines into negative equity and you cannot re-mortgage or sell - then most post Feb 1 2008 IVA's allow for this and most arragements continue for another 12 months. Pre 1 Feb IVA's depends on the terms. My view is that only when the property is sold is the shortfall crytalised and at that point the shortfall is a post IVA liability (subject to advice Melanie is getting) I know Liz disagrees and quotes a case but my interpretation is different. This post IVA liability can be brought into the IVA if the lender is willing to allow it to - and most do. Otherwise the lender could press for re-payment which could jeopardise the existing IVA - lets wait for some definitive advice. Over to you Melanie.

[MelanieGiles]

I'm still waiting to hear from my solicitors - but will report back as soon as I can. I know that Elizabeth is also seeking her own legal advice as well.

[David Mond]

Give them a push as it is a very interesting point!

[MelanieGiles]

And we will have to buy Elizabeth a big dinner if we are wrong!!!