One of the serious consequences of the Covid-19 pandemic is that more and more people are going to find themselves in serious debt. Not that personal debt and insolvency was not a major issue before the virus struck. Personal insolvencies in 2019 were the highest ever at 122,181. This is a 6% increase on 2018 as figures increase year on year. Given that these debt solutions remain on a person’s credit file and an insolvency register for 6 years – well over half a million people are already affected.
Insolvency means that there is no reasonable way for a debtor to repay their unsecured debts (personal loans, overdrafts, credit/store cards, catalogues, credit agreements and certain arrears and overpayments). And of the insolvency solutions available, Individual Voluntary Arrangements (IVA’s) are by far and away the most popular at 60% of the total. (The other insolvency solutions are bankruptcy and Debt Relief Orders which are a simpler version of bankruptcy for those that meet certain conditions e.g. debts being less than £20,000 total).
So hundreds of thousands of people are in IVA’s at any moment in time – and many others are exploring it as a vital and strategic way to solve a serious debt problem. An IVA differs from bankruptcy in that certain assets are legally protected (e.g. property, vehicle) and is more discreet (employers/landlords are unlikely to be aware). An IVA involves repaying one affordable monthly payment to cover all the unsecured debts. The affordable amount is calculated by examining income and outgoings and presented to the creditors by a proposal drawn up by a licenced Insolvency Practitioner. Assuming the IVA proposal is accepted by creditors, then for a fixed period (usually 5 years), during which time no interest can be added, no action taken nor contact made by creditors. At the end of the IVA– all remaining debt written off. At this point or soon after credit rating which has been severely affected can be rebuilt.
Debt is no respecter of person or position. An IVA is a potential solution for all with personal debt including sole traders and Company Directors (limited company debt is not included – but guarantees by Directors would be included as personal debts).
Covid-19 is simply going to make matters a lot worse. Fortunately there is some immediate assistance from the Government and from creditors. The Government has announced help for individuals furloughed and quicker access to benefits; creditors by allowing payment holidays and not following through on legal action to recover unpaid debts for the time being. And the Insolvency Service (overseeing and regulating the insolvency industry) have issued new guidelines (23 April 2020) trying to provide guidance and help for debtors and Insolvency Practitioners. During these unprecedented times. For those in IVA’s and affected financially by the pandemic, immediate relief is available by way of a 3 month payment holiday and/or a 25% reduction in the payment level. Crucially this can now be done without recourse to a new meeting of creditors to approve the holiday/reduction in payment level which is usually the case. This takes time and money to set up. The Insolvency Practitioner is now authorised to provide these helps under their own initiative.
And for those considering an IVA, there need not be the long wait before applying. In an IVA proposal, evidence of income is essential. This can take the form of payslips, tax returns (for the self-employed) or bank statements showing benefits, pensions etc. With so much uncertainty in the present and future for many people it was feared that Government-assisted income might not count given its temporary nature. The Insolvency Service has suggested that it is permissible to include this income although clarification will still be required of plans to continue with IVA payments once the Government help ceases.
In terms of debts – we may be experiencing a period of relative calm before the storm. Government and creditor support plus possible help relating to mortgage and rent payments means there is immediate breathing space for the worried debtor. However – the debts are not going to go away. Sooner than later, facts need to be faced and plans made. Given that we know the economy will take a massive hit in the aftermath of the virus, individual debtors will need to be aware of all options available to them from the formal insolvency solutions to the informal repayment plans.
Exploring the suitability of an IVA is a remarkably straightforward process. Initial advice is key! A 20 minute phone call with a debt advisor or an IVA company should help to establish whether an IVA is an option or not. Someone may not qualify if there debt is perceived to be too low (maybe less than £7000) or that they have significant assets that can be utilised, or that they have to little available income for an IVA payment or too much – meaning they could pay off the debt with an informal plan in less than the 5 years of an IVA. But for hundreds of thousands of people an IVA may provide an excellent way of structuring debts in a managed and legally binding arrangement with a definite end point. A proposal can be set up within a month or so and presented to creditors. And most IVA companies will advise and set up an IVA with no costs involved at all – fees are then paid from the monthly payments that are made into the IVA and not in addition to them.
These are challenging times and many will be facing tough decisions in the weeks and months ahead. It just may be than an IVA will provide a secure route to a debt free future.