Why is my home important when considering an IVA?
An IVA protects essential assets such as your home from unsecured creditors and provide allowances within your expenditure budget to maintain secured payments. This means you can retain ownership and continue living in your home.
This is unlike:
- Bankruptcy where ownership of your home is passed to the official receiver or trustee in Bankruptcy. If you have any equity in your home the Official Receiver or Trustee must take action to release this for your creditors. This means your home may be at risk of being sold.
- Informal payment arrangements where no protection from legal proceedings to recover outstanding debts by way of charging orders or repossessions is offered.
Therefore, when considering an IVA, creditors need to know exactly how much potential equity is in your property to determine whether the IVA offers your creditors an acceptable return compared with the alternatives.
Will having value in my home stop me from getting an IVA?
To qualify for an IVA you must firstly be insolvent. There are 2 ways to determine whether you are insolvent or not.
- Your debts are more than your assets (such as equity in property).
- You are unable to pay your contractual debt repayments as and when they fall due.
Most people with assets of value are deemed to be insolvent based on point 2. Homeowners with high levels of equity can still qualify for an IVA, as an IVA may well be an acceptable solution for your creditors (companies you owe money to). An IVA can offer your creditors a reasonable return on what you owe compared to alternatives such as bankruptcy.
What if I have more equity than debt when looking at an IVA?
In these circumstances an IVA may still be a viable option for you in order to protect your home and avoid having to sell to repay your creditors. The IVA must also be a fair solution for your creditors and as the current climate makes it difficult for people to sell their home or even obtain a secured loan or mortgage to repay their debt, creditors may consider an IVA to be a fair payment option on what you owe.
At Financial Support Systems we are able to review and advise on IVA’s for people who have large amounts of equity to consider whether this is the best solution for all parties.
How is equity calculated when considering an IVA?
When considering whether an IVA is suitable for both you and your creditors it is important to be realistic about the available equity in your property. Therefore when considering an IVA, Financial Support Systems will prepare a comparison which shows what creditors could expect to get back should you or your creditors look to declare you bankrupt and compare this with what you propose to offer in your IVA.
The calculation of your property equity will be done by firstly using a recent market valuation of your home (usually obtained for free from independent valuation sites on the internet). We will then allocate a value equal to 85% of the market value and then subtract any mortgage, secured loans or charges. We will also take account of the interest of any other owner of the property such as your spouse or partner.
Market Valuation = £200,000
85% of Market Valuation = £170,000
Less Mortgage at £120,000 = £50,000
Partner share of Equity @ 50% = £25,000 (usually for matrimonial homes in the UK insolvency law, ownership is considered to be a 50/50 split unless stated otherwise in the deeds)
IVA EQUITY = £25,000
Why do you represent the value of my home at 85% of the market value in an IVA?
There are two main reasons we represent the property value at 85%.
- Reason 1 – In an IVA, you may be expected to look into remortgaging your property to realise equity for the benefit of creditors and creditors will never expect you to obtain a mortgage that is greater than 85% of the property’s market value. This is to ensure you always retain 15% equity in your home to avoid worsening your situation by securing a debt against your house that is close to its market value and risking the house falling into ‘negative equity’ should the property market change. (see Equity Release in an IVA for more information)
- Reason 2 – When presenting an IVA to creditors we will always compare what your creditors can expect to get back in the IVA with the likely repayment in bankruptcy. In the event of bankruptcy your property may need to be sold quickly and costs are likely to be incurred in possession proceedings, insurance, repairs and property management. The need for a quick sale and the additional costs of bankruptcy inevitably mean that it is realistic to forecast a bankruptcy property sale at 85% of the property’s market value.
Releasing Equity in an IVA
It is important to note that when considering an IVA as an option to deal with unmanageable debts creditors will almost always be agreeing to write off debt that you cannot afford to repay.
Therefore, they expect homeowners to look in to the possibility of remortgaging their property or obtaining a secured loan just before the end of the IVA to realise equity if it is affordable for you to do so. They will not expect you to sell your home and they will not expect you to take on an unaffordable mortgage or secured loan.
It is important to note the factors taken in to consideration when considering the remortgage or secured loan as part of the IVA.
- Homeowners are expected to make reasonable efforts to release any available equity but are not expected to sell their property or obtain a mortgage or loan that is unaffordable.
- You will only be expected to secure a mortgage or secured loan that is no greater than 85% of your property’s market value. This means you will always retain 15% equity in your home as a minimum. In today’s lending climate there are few if any lenders who will provide loans or remortgages for this purpose at this amount. Provided you have made reasonable efforts to release equity your creditors will accept the amount your IVA supervisor agrees is the maximum any reputable lender will lend to you and which you can afford to repay.
- You will only be expected to look to remortgage if the equity in your home is greater than £5,000 using 85% of the property’s market value and taking away any mortgage, secured loans and 3rd party interests such as a spouse or partner.
- Your new mortgage or secured loan repayment must not be more than 50% of the amount you pay in to your IVA. This ensures that your new mortgage or secured loan is affordable, sustainable and does not put you in a worse position if obtained.
What is the process for looking to remortgage in the IVA?
6 months before the completion of your IVA, your IVA Supervisor will work with you to consider your current equity position and affordability.
Your Supervisor will:
- Assist you in obtaining up to date Market valuations of your property.
- Review the equity levels in your home taking account of any mortgage, secured loans and 3rd party interests such as a spouse or partner.
- Consider the affordability of a mortgage or secured loan and make sure the mortgage or secured repayments are not more than 50% of your monthly IVA payment.
What if there is no equity?
If there is no equity or the value of the equity is less than £5,000 your IVA will conclude without you having to pay anything further. You will not be asked to sell your home and no further investigations will take place.
What if I have equity but can’t release it?
If there is considered to be equity greater than £5,000 but you cannot release the equity because:
- You can’t obtain a mortgage or secured loan.
- A co-owner not part of the IVA will not consent to remortgage or secured loan
- The payment to your new mortgage or secured loan would increase your current payments by more than 50% of your IVA contributions and are therefore not affordable
It is likely in these instances that creditors will request you to pay 12 additional monthly payments into your IVA in substitution for not releasing equity. You will not be requested to sell your home and no further investigations into a remortgage or secured loan will be required. You will simply make 12 additional monthly payments and the IVA will conclude successfully.
Subject to eligibility and acceptance. Fees Payable. Debt write off applies to unsecured debts only and on successful completion of an IVA. If your IVA fails, it could lead to Bankruptcy, although this is rare and alternatives may be available. Your ability to obtain credit will be affected for the medium to long term. Homeowners may be required to release equity in their property, subject to certain criteria. If unable to release equity and equity is available an additional 12 months payments may be requested in compensation.
Financial Support Systems provides insolvency solutions to individuals, specialising in IVAs. We do not administer or provide advice relating to debt management products, such as Debt Management Plans. Advice and information on alternative options will be provided following an initial fact find where the individual(s) concerned meets the criteria for an IVA and wishes to pursue it further, as governed by our Insolvency Practitioners' regulators, the Institute of Chartered Accountants in England and Wales. All advice given on any alternative options is therefore provided in reasonable contemplation of an insolvency appointment.
The Money Advice Service is a free service set up by the Government to help people make the most of their money. If you would like to learn more click here.
The Association of Business Recovery Professional, known as R3, produce a booklet called "Dealing with money worries - A guide to your options". This is a very helpful summary of the various options for dealing with debt and a copy can be found at the following link. Please also see link to 'Voluntary Arrangements - A Guide for Creditors on Insolvency Practitioner Fees'.