An Individual Voluntary Arrangement (IVA) is a formal agreement between an insolvent debtor and his or her unsecured. The terms of the IVA provide for the debtor to repay a portion of his or her unsecured debt over a limited period of time. Most IVAs are for a period of five years, but it can be for a shorter or indeed a longer period.
If the debtor owns a property in full or in part, unsecured creditors will naturally seek to have at least some of the equity in the property realized for their benefit. Secured creditors, such as the mortgage provider, expect to receive the full contractual repayments on their secured loans. Repaying the mortgage continues right through the term of the IVA and until it is fully paid off.
The unsecured creditors take into account the current market value of the property and the amount owing to the mortgage provider. The debtor is expected to provide a current, true and fair market valuation of the property and to furnish a current mortgage redemption statement, showing the total cost of clearing your mortgage, including any early redemption penalty which might apply.
With these two pieces of information, the unsecured creditors can quickly assess if there is any equity in the property and more importantly whether such equity is realisable. If there is realisable equity therein, the unsecured creditors may, by modification to the proposals, require the debtor to re-mortgage the property during the life of the IVA and to introduce some or even all of any released equity into the IVA for their benefit.
A well constructed IVA proposal will already include a provision for re-mortgaging the property and offering equity to creditors. However, it may well be that re-mortgaging is not an option for the debtor simply because no high street mortgage provider is willing to provide a remortgage due to the debtor’s poor credit history. In recent years, property values have dipped sharply, and many people find that their property is in negative equity i.e. the cost of redemption of the mortgage is greater than the current market value of the property. If the debtor is forced to sell the property, the shortfall that would arise and be due to the mortgage provider would become a further unsecured liability and so would rank for dividend with all the other unsecured creditors, thus depressing the dividend in an IVA.
A further consideration for both creditors and the debtor is that a partner or spouse may have an equitable interest in the property. In many cases that interest is 50% of the equity. The debtor’s family may also have rights of residence in the property which could make a forced sale difficult for creditors, at the very least.
While an IVA can affect a debtor’s mortgage, in most cases debtors will not ‘lose’ their house in an IVA, provided they are agreeable to contributing a reasonable amount of any realisable equity.
An insolvent debtor, who is considering entering into an IVA and who is concerned that it might affect their mortgage, should initially consult with an Insolvency Practitioner (IP) for advice. They should also consider taking independent legal advice, if the property may be co-owned by a partner or spouse or if family members may have statutory rights of habitation.