IVA.co.uk

Simplifying the IVA

IVAs were introduced just over 20 years ago under the 1986 Insolvency Act to provide a flexible debt resolution alternative to bankruptcy for professionals and company directors. They provided debtors with the certainty of making reasonable payments over a set period of time, while providing maximum returns to creditors.

Since their introduction, a growing number of people in full-time jobs have elected to enter into IVAs as a means of dealing with their debts.

On May 8th 2007, The Insolvency Service announced that they had begun a 12 week consultation process to examine proposals to simplify Individual Voluntary Arrangements (IVAs).

In a bid to simplify the current process for those with undisputed debts of less than £75,000, changes being considered include:

- Approval of an IVA by a simple majority vote
- Creditors not being able to change the debtors’ proposals
- Creditors having to file their claims within 90 days.

There are also proposals to reduce the administrative burden on Insolvency Practitioners (IPs) who supervise IVAs in a bid to ultimately reducing the administrative cost to the debtors.

The consultation ends on the 3rd August 2007.

How the Changes Could Affect You

It is the likely that the SIVA (Simple IVA) will introduce the following:

• People with debt below £75k will be eligible, but not if they are self-employed
• The acceptance criteria will reduce from 75% of the value of voting creditors to 50%
• Creditors will not be able to modify the proposal - its take it or leave it
• The IP will have to do less work (no Chairman's report or annual reporting) and so the fees charged will be lower

The most important element of these changes for the average debtor (i.e. less than £75k of debt and employed) is the change in voting criteria. Currently, if a debtor owes £40k, and £10k is to Creditor A, then Creditor A has 25% of the total debt. If they vote on the IVA and say ‘no’, then it is extremely unlikely that the IVA would be accepted as it would be very difficult to get 100% of all the other creditors to vote and say ‘yes’. However, with a SIVA in the same situation, you only need £10k of the other creditors to vote ‘yes’ to make the total value of the creditors who vote £20k, thus achieving a 50% ‘yes’ vote overall. Thus it is likely that people will find it easier to get into a SIVA than the current IVA.

In the current climate, where creditors such as Northern Rock and MBNA are proving difficult to deal with, this development will bring in a significant advantage for the debtor because SIVAs will be put in place where the traditional IVA would have failed.

On the other hand, the change in fee structure is likely to have a major effect on creditors and IPs, but will not actually affect the individual debtors much at all.

SIVAs in the News

Below is a roundup of some of the recent news coverage of the proposed simplification of Individual Voluntary Arrangements.

Talks to resolve row over IVA fees
By Geoff Ho, The Express on Sunday, 10 June

CAPITAL ONE's bitter row with debt advice companies could soon be over as the credit card giant looks set to compromise on how much it pays for individual voluntary agreements (IVAs) after a secret meeting.

Capital One met six debt advisers at the Department for Trade & Industry last week and sources believe progress has been made.

It is now willing to discuss IVA fees with the debt advice companies on an individual basis. Capital One had previously taken a hard line with the companies, insisting it would not accept any agreements that came with charges in excess of £4,500. Most suppliers demand £8,000.

Lenders believe the growth in IVAs is directly responsible for falling profits and fees charged for brokering the deals between consumers and creditors are excessive.

Sources add that Capital One is prepared to take on IVAs where consumers repay as little as 10p in the pound, as long as it is satisfied debt companies have provided clients with appropriate advice and performed due diligence.

Previously lenders have insisted on getting back at least 45p in the pound from over-extended consumers.

The meeting between Capital One and debt companies raises hope of an industry-wide peace deal, as the credit card firm is believed to be acting as a proxy for the banks.

Last month, the British Bankers' Association demanded that debt companies slash charges for arranging IVAs. Banks also want the fees they pay debt companies to be spread over the life of an IVA.

Government blasted over 'insolvency-lite' proposals
Kevin Reed, Accountancy Age, 24 May 2007

Fears grow that a dilution of the regulatory climate will be dangerous

Businesses and individuals could have their insolvencies signed off by professionals with only a fraction of the experience currently required, under new government proposals.

The proposals are stoking fears of a reckless dilution of the current regulatory climate and have set the government on a collision course with one of the major professional bodies for the insolvency industry, the Insolvency Practitioners Association (IPA).

Currently fully-licensed insolvency practitioners require 4,000 hours experience. IPA director general Peter Joyce claims the insolvency service is considering a figure of around 400 hours’ experience for a proposed qualification dubbed an ‘insolvency-lite’.

The IPA has warned that the moves could lead to reckless decision-making on behalf of debtors and might incite banks to force them into bankruptcy. It argues a minimum of around 2,000 hours will be necessary for the new qualification.

The IPA and the ICAEW have recently looked into providing the new qualifications, but the Insolvency Service’s willingness to set a low benchmark has worried the IPA.

Joyce warned that major creditors could baulk at debt plans proposed by an administrator if they believe the administrator has made an uninformed decision.

The proposals follow soaring personal insolvencies on the back of government legislation making it easier to enter formal debt proceedings. The Insolvency Service also launched a paper last week outlining ‘simple’ IVAs, for those with debts less than £75,000.

A SIVA would not include a creditors’ meeting, and a majority of creditors would have to agree to a debt proposal as opposed to 75% for regular IVAs.

‘[Creditors may] feel with a SIVA – where there’s no meeting of creditors – that in the present climate [of also introducing a lighter qualification] they might turn their faces to debt proposals. If we don’t square this, there must be a risk that debtors will have to go for the more complicated route (IVA) or go into bankruptcy,’ said Joyce.

A spokeswoman for the Insolvency Service said practitioners undertaking just voluntary arrangements would not need the same knowledge and experience as an insolvency practitioner who deals with all types of debt appointments.

The ‘insolvency-lite’ practitioner, known as a voluntary arrangement practitioner, would need to demonstrate they had ‘at least’ the same depth of academic knowledge as an existing insolvency practitioner, she added.

Will the banks back simple IVAs?
Kevin Reed, Accountancy Age, 24 May 2007

The government has outlined plans to overhaul individual voluntary arrangements, requiring fewer court papers to be filed, as such arrangements surge in popularity.

The Insolvency Service has come up with plans to streamline the process. The agency originally released two different proposals for a ‘simple’ IVA, now whittled down to one and in its final period of consultation.

The simple IVA, or SIVA, is the central part of the agency’s plan to speed up processes, saving costs for insolvency practitioners and giving better returns to creditors.

The agency proposes that the SIVA will be for liabilities of less than £75,000. Creditors will have to attend fewer face-to-face meetings and will not be able to suggest modifications to the debtor’s proposal. A majority of creditors, rather than 75%, will make decisions.

A SIVA will, crucially for practitioners, have simpler reporting requirements and no filing of routine papers to court. Creditors will have to make claims within 90 days.

The Insolvency Service estimates that as many as 80% of IVAs in 2005 would have fallen into the SIVA regime.

The Insolvency Practitioners Association welcomes the gist of the proposals, but warns that there is still much work to do to make sure the banks are kept onside.

IPA policy chief Peter Joyce says two issues must be ‘squared off’: simplifying the insolvency processes in tandem with reducing barriers for individuals to administer insolvencies through ‘insolvency-lite’.

Joyce warns that making it easier for debtors to enter insolvency will not be looked upon kindly by banks if they are concerned about the level of qualifications required for individuals to manage insolvencies.

‘We think IVAs are good, and SIVAs potentially good, but we don’t want to run into opposition. Whether creditors in the present climate turn their face against these proposals, there’s the risk debtors will have to use the more complicated [IVA] procedures or face bankruptcy,’ said Joyce.