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Why a creditor might reject your IVA
If you are thinking of applying for an IVA, you probably have many questions. If you apply for an Individual Voluntary Arrangement (IVA), what are the chances your application will succeed? Could it be rejected? And if it is rejected, what happens next?
An Individual Voluntary Arrangement (IVA) can do wonders for people who are suffering from crippling debt which they can’t afford to pay back.
That being said, if you’re opting for an IVA, there’s a chance you may have trouble getting your creditors to accept it.
In this article, we will look at why some creditors may decline your IVA proposal, what you can do to prevent this from happening and what options you have if this does end up happening.
How does the initial IVA Proposal Work?
When you decide to opt for an IVA, the first thing you will do is look for an insolvency practitioner (IP). If you’re opting for an IVA company, be sure to go for one that is authorised and regulated by the Financial Conduct Authority (FCA).
Once you’ve found one, you and your IP will sit down and draft an IVA proposal.
The IVA proposal will have detailed information about your income, expenditure, total debt and assets. It will also have a complete payment plan that would be put into place if your creditors were to accept your IVA proposal.
Once you’ve drafted your IVA proposal with your practitioner, they will call a meeting with your creditors and present the proposal to them.
Your creditors will then deliberate over the proposal and either accept or reject it.
In order for your IVA proposal to be approved and your IVA to be put into place, you’re going to need the approval of at least 75% of your creditors.
It’s important to note that the vote of every creditor does not hold the same weightage; It depends on how much money you owe to them.
Can an IVA application be rejected?
Yes, it can. It doesn’t happen often, because any application for an IVA needs to be made through an Insolvency Practitioner (IP). IPs are professional debt managers who negotiate with creditors on your behalf. They know the requirements of a successful IVA and they know the likelihood of creditors agreeing to it. It’s far more likely you’ll be advised to take an alternative debt management route rather than applying for an IVA they know will be rejected.
Why are IVAs rejected?
When you apply for an IVA your IP will put together a proposal that will detail how much you can pay each month towards your debts. Your creditors then vote to approve or reject it.
Working in favour of a ‘yes’ vote is the fact that creditors are unlikely to get much (if anything) back if you are declared bankrupt. They are likely to lose less by agreeing to the IVA. Against this is the fact that each creditor is likely to have its own guidelines which set out minimum repayment levels. They are unlikely to be able to agree to any repayments below this.
This is where the role of the IP is crucial. They have the experience to know the level at which your creditors are most likely to agree to the IVA.
Do all creditors need to agree to an IVA?
No. Providing more than 75% of them agree (that is, creditors accounting for 75% of the value of the debt, not three-quarters of the number of lenders), the proposal will be approved. At that point, even the creditors who didn’t agree to it will be bound by it.
Alternatively, the creditors may approve the proposal on the condition that certain changes are made to it. You have 14 days to consider these and you don’t have to agree to them, but if you don’t accept them your IVA will be rejected.
Why was my IVA rejected by my creditors?
There could be a number of different reasons, depending on your circumstances, as to why your IVA was rejected.
Some of these are:
You provided incorrect or incomplete information
Remember that your creditors are people or entities that have been dealing with you for a while. Hence, they will have some semblance as to what your financial circumstances are.
When you’re coming to them with an IVA proposal, they will accept you to be thorough as well as truthful. Thus, if a creditor is aware that you’re hiding something in your IVA proposal or are presenting it as something that it’s not, it’s highly likely that they will reject your proposal.
Your creditors may inquire about it with your IP who will be chairing the IVA meeting of creditors but they are under no obligation to do so.
There’s a chance that they may flat-out reject your proposal if they feel that they’re being lied to.
Thus, it’s important that you be extensive and honest when you’re writing your initial proposal in order to get your IVA approved.
Unrealistic budget or payment plan
When you’re trying to take care of your debt through an IVA, you’re going to need to be honest about what your payment plan is going to look like.
It should be your best possible attempt to address the unsecured debt you have with your creditors.
Thus, the payment plan that you propose to take care of your debts should be consistent with the income and expenditure you provide in your proposal.
It’s important that you disclose all the debt you have as well as all the income that comes your way each month. Nothing should be omitted, understated or overstated.
For example, if you work overtime regularly and this boosts the amount of income you get, then you should include this information within your proposal.
Similarly, the essential living expenses which you detail in your proposal should also be reasonable.
If you share your household with a partner, then your creditors will expect you to spilt the household costs with them in a reasonable way.
Your proposal may not be viable for a creditor
Of course, if a creditor feels that the amount that they’ll be paid back by you will be very low if they enter into an IVA with you, then they’ll reject your offer.
It’s more likely that creditors will be willing to accept your proposal if they feel that there’s no other way you can realistically pay back your debt to them in full.
Your proposal may not be viable for a creditor
If a debt management plan or DMP could result in all creditors being repaid in full in a reasonable period of time, then creditors might also reject proposals for an IVA. The question arises as to what constitutes a reasonable period of time. Given that many IVAs are for a term of five or six years, then a reasonable period of time for a DMP could be anything from six years to ten years. Such an outcome might well depend on some or all interest and penalties being frozen during the life of the DMP and that is by no means guaranteed.
A further factor is that some creditors prefer the legal framework in which IVAs are supervised as distinct from the largely unregulated, informal and voluntary nature of DMPs.
The relationship between the creditor and the debtor is also a significant factor in determining the creditor’s attitude. If you are a relatively new customer and the debt was incurred within the last six months, it would not be surprising for the creditor to reject the IVA. On the other hand, if you are a customer of long-standing, say ten years or more, and the new debt was simply a consolidation of several existing debts with that creditor, then the creditor is more likely to accept the IVA, given their long term knowledge of your financial history.
Your past behaviour may be unacceptable
The creditor may decide that the IVA would be likely to fail in supervision based on their knowledge of your lifestyle. A creditor may look at how the debts were accrued in the first place. If you engaged in a lavish but unsustainable lifestyle over a period of time apparently not caring whether such lifestyle debts could be repaid or worse, borrowing recklessly knowing that the debts could not be repaid in any reasonable time frame, then a creditor aware of this fact would be inclined to reject such a proposal. If your lifestyle involved chronic addictive behaviour such as excessive gambling, drinking or drug-taking and if the insolvency was likely to be due to such behaviour, creditors would have to be satisfied that such behaviour had ceased and that you had taken reliable corrective action to sustain the changed and improved behaviour, before accepting such an IVA.
What should I do if my IVA gets rejected?
Debt Management Plan (DMP)
A debt management plan is similar to an IVA in that it’s an agreement between you and your creditors that you will make small payments to them monthly and pay your debt back to them over an agreed-upon period of time.
Please note that a DMP is not legally binding like an IVA is.
You can choose to set up a DMP yourself with your creditor(s) or you could also hire a debt management company (or debt charity) to get it set up. Always opt for a company that is authorised and regulated by the Financial Conduct Authority.
Debt Relief Order (DRO)
You can opt for a DRO if your overall debt amounts to less than £20,000 and you have a spare monthly income of less than £50.
A DRO is much quicker than an IVA as it ends within 12 months. However, in order to qualify for a DRO, you need to have little to no assets to your name. There are also other strict eligibility criteria that you should be aware of.
You could file for bankruptcy and get your debt settled in a relatively shorter amount of time.
Unlike IVAs, your assets are not protected when you declare bankruptcy. They can be seized and sold off.