With more people facing financial difficulties, Individual Voluntary Agreements (IVAs) are a popular
solution to those that may otherwise be facing bankruptcy. However, in order for an IVA to proceed,
the debtors' creditors must first agree to the terms. While it is not possible to force the creditors
to agree, there are certain things that can be done to help influence their decision in favour of the IVA.
It is important to first understand how the IVA process works and how creditors reach their decision.
Overview of the IVA requirements
The basic requirements of an IVA are that the individual must have at least £12,000 of unsecured debt,
usually split between two or more creditors with at least three lines of credit. They also need to be
insolvent (i.e. after all essential expenditure, there is not enough money left over to repay the creditors).
Insolvency also means that the debtor doesn’t possess assets that can be sold to release the funds to repay
the debts. In order for the IVA to go ahead, creditors of at least 75% of the debt must agree to the terms.
For example, if £20,000 is owed, then as long as creditors that are owed at least £15,000 of the debt agree,
then the IVA will go ahead.
IVAs Vs Bankruptcy - the creditor’s perspective
The main alternative to an IVA would be Bankruptcy, however as the official receiver will charge a large
fee for this, therefore the creditors may not get as much of a financial return then if the debtor entered
an IVA. For this reason, creditors are wary of pushing for bankruptcy when there may be an alternative.
How do creditors agree an IVA?
In order for an IVA to be accepted, creditors of at least 75% of the amount of the debt in monetary
value must agree to it. So if the total debt was for £16,000, with Creditor 1 being owed £12,000, creditor
2 owed £3,000 and creditor 3 owed £1,000, if creditor 1 agrees to the IVA and creditors 2 and 3 refuse it,
as creditor 1 is owed more than 75% of the value of the debt, the IVA will be passed and it will become
legally binding for all creditors involved. However, it should be noted that if 2 or more creditors who
hold more than 25% of the debt join forces, known as a controlling vote, this could affect the outcome in
favour of refusing the IVA.
Ensuring the best outcome
Creditors will always look at the overall financial outcome of the IVA vs Bankruptcy. Therefore, by putting
forward a detailed proposition, which will mean the creditors will receive back more of the outstanding debt
than the alternative, then they should hopefully agree. By working closely with a licensed Insolvency
Practitioner, a proposal that will see the creditors receive a higher return than bankruptcy will give the
applicant leverage, and hopefully put them in a stronger position in order for the IVA to be accepted.