Re-calibrating Individual Voluntary Arrangements in the cost of living crisis
July 29, 2022
The flip side of rampant inflation is how it deflates not just the disposable income available for the basics in life, such as food, energy and transport, but the resources available for individuals to repay past debts through an Individual Voluntary Arrangement (IVA).
Almost 160,000 IVAs were started in 2020 and 2021 in England and Wales and a further 42,789 have been launched so far in the first half of 2022. The underlying assumptions behind virtually all of these arrangements have been thrown into chaos as inflation roars ever upwards, reaching 9.4% in June and predicted to peak at 12% later this year.
The Insolvency Service has acted with commendable speed by issuing new guidance on IVAs in July. The advice notes that existing agreements may have been drafted before the individual had knowledge of the “current financial climate, rising inflation, and increases to energy and other household outgoings”. These pressures “may have an impact on a consumer’s ability to be able to make monthly contributions … at the same level as previously agreed”, it goes on to say.
Flexibility of an Individual Voluntary Arrangement
One of the major advantages of an IVA is the flexibility it offer struggling debtors, both at the outset and as it progresses. There is no such thing as ‘one size fits all’, which recognises how widely each debtor’s finances differ and how variable their creditors and their attitudes can be. Fundamentally, each IVA is a one off haggle and their terms are infinitely flexible, subject only to certain generally accepted norms about exactly how big a haircut the key creditors are prepared to accept.
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Changing creditor attitudes
The Insolvency Service believes that insolvency practitioners supervising IVAs should consider requests from people who want to lower their monthly payments, with creditors generally being asked to accept reductions of up to 50% of the previously agreed contributions, down to a suggested minimum of £75.
Ultimately, the decision is down to the creditors, who must agree such downward revisions. The majority of creditors will be financial institutions such as credit card companies and they know all too well how much blood can be squeezed out of an inflation-ravaged stone. Anecdotal evidence suggests that creditors are now receptive to new deals with debtors.
Alternative options to an Individual Voluntary Arrangement
If monthly payments were to drop below this £75 minimum level, the Insolvency Service recommends that the insolvency practitioner should consider whether to end the agreement early based on the payments already made into the plan. They would also have to consider whether an alternative solution, such as switching to a debt relief order or filing for bankruptcy, would be more appropriate.
Generally, IVAs have an annual review process built into their terms, but in the present crisis, there is no need to wait until then. Debtors can take the initiative by approaching their practitioner to initiate a revision to their IVA repayments, an early end to it or a move over to another debt settlement process.
As a Group, Opus is here to advise and help businesses and individuals facing financial challenges. We have offices nationwide and by contacting us on 020 3326 6454, you will be able to get immediate assistance from our Partner-led team.