Month: February 2022

IVAs For The Self Employed

Until Individual Voluntary Arrangements (IVAs) came along, the main alternative for business owners with serious debt problems was bankruptcy. Unfortunately, whilst this would solve the immediate issue of dealing with overwhelming debt, it also meant that the business usually had to be closed, staff laid off and any assets such as buildings sold.

IVAs have changed all that, making life a little easier for self-employed people who find themselves struggling with debt. We take a look at how IVAs work for business owners and answers some of the questions we’re often asked by our self-employed clients.

A solution for both personal and business debts

The beauty of an IVA is that you can include both your personal and business debts within it. This includes any overdue taxes (including VAT) and National Insurance that you owe HMRC. This comes as a relief to many business owners, as HMRC doesn’t take any prisoners when pursuing debts.

You can also include loans and credit cards taken out in your company name and any unsecured debts that you owe personally. It’s important to note, however, that an IVA can’t be used for secured debts such as mortgages or Hire Purchase agreements. So if you have debts secured on property, or equipment such as printing presses, you’ll need to keep up with your payments to avoid repossession.

You can carry on trading as normal

Your day to day business operations will be largely, or completely, unaffected by your IVA. If you owe money to your personal and/or business bank through a loan or overdraft and this is included in the IVA, you’ll need to close the accounts in question and open new ones. But otherwise, you should be able to carry on as normal: keeping your finance agreements in place, and retaining your business assets and staff.

Your clients don’t need to know

An IVA is a more private solution than bankruptcy. Details will appear on the public Insolvency Service register but not in the newspapers, so it’s unlikely that your clients will find out about your debts unless you tell them yourself. This element of privacy is a big advantage of a self employed IVA, as it could help you retain business that you might otherwise have lost.

You’ll need to keep a close eye on cashflow

When you enter into an IVA, you’re committing to pay a set amount off your debts each month, usually for five years. This means you’ll need to keep a very close eye on your business cashflow to make sure you can keep making these monthly payments. You’ll also need to show the licensed Insolvency Practitioner (IP) dealing with your IVA that you can afford the payments in the first place, by presenting your accounts and cashflow projections.

If you do experience a dip in cashflow during your IVA, it’s not the end of the world. Your IP may be able to vary the amount of your monthly payments for a while, if your creditors agree to this. It’s important to note, however, that the IVA will fail if you don’t meet the payment obligations agreed with your creditors – and this could lead to your bankruptcy.

You’ll be subject to certain restrictions

An IVA doesn’t change your working life in the way bankruptcy would, but there are still some important factors to bear in mind. There’ll be restrictions on your expenditure and you probably won’t be able to get any more credit (secured or unsecured) whilst the IVA is in place. Your credit rating will also be affected for up to six years from its start date.

Also, if you own business or personal property, you may be required to re-mortgage or release equity from it during the IVA, usually in year four, for the benefit of your creditors. If you’re unable to do this, the IVA may be extended.

Debt Management may also be an option

If an IVA isn’t a suitable option, you may be able to consider Debt Management instead. You’ll need to have unsecured debts of more than £3,000 and be able to repay your creditors at least £100 a month. Debt Management is an informal solution, so it doesn’t give you the legal protection offered by an IVA, but it could help you avoid bankruptcy if your debts aren’t too serious.

Do I Need To Remortgage During An IVA

If you are a homeowner and have equity in your property then you’ll usually need to remortgage or release equity from your home during the fourth year of your IVA. An Individual Voluntary Arrangement (IVA) can be an option for managing your debts if you owe over £6,000 in unsecured debts and can afford to make monthly repayments of at least £80. If you’re a homeowner, an IVA offers you an advantage over bankruptcy and Debt Management, as your home will be protected from legal action by your creditors.

Once your IVA is in place, your creditors can’t ask the court to make a charging order that would secure previously unsecured debts against your house or flat. They also can’t petition for your bankruptcy, which could lead to your home being sold for the benefit of your creditors.

However, it’s important to recognise that your home could still be at risk with an IVA, for example, if you don’t keep up with your monthly payments. And you’ll almost certainly be required to either re-mortgage or release equity from your property to help repay your debts.

Here we will answer some of the most common questions we’re asked about re-mortgaging or releasing equity during an IVA.

1. When will I need to re-mortgage my home?

You’ll usually need to re-mortgage or release equity from your home during the fourth year of your IVA. Most IVAs run for five years, so you’ll be coming towards the end of the arrangement. The reason for this timing is to give you some breathing space to get back on your feet, so you won’t be hit too hard by the additional costs of re-mortgaging or releasing equity.

2. Will I be told about this in advance?

Yes. The licensed Insolvency Practitioner (IP) who sets up your IVA will discuss the possibility of re-mortgaging or releasing equity before the arrangement is set up. If they decide that this will be required, it will form part of the proposal that will be sent to your creditors for consideration. If the IVA is approved, the requirement to re-mortgage or release equity will then be written into its legally-binding terms.

3. How much equity will I need to release?

Your creditors will expect you to raise as much money as possible to help repay your debts. However, the amount you’re able to borrow will depend on your individual circumstances, such as your credit history and the amount you can afford to repay your lender each month. The percentage of equity you can release from your property may also be capped to, say, 75% or 80%, by individual lending policies.

4. Will I get the same interest rate as my current mortgage?

Not necessarily. The interest rates available to you will depend on market conditions and may also be affected by your credit rating and/or payment history with your current lender. This could mean that you end up paying more for the amount you’re currently borrowing on top of the additional amount for the re-mortgage or equity release loan. There may also be upfront fees to pay, even if you stay with the same provider.

5. What if I can’t re-mortgage or release equity?

It isn’t always possible to re-mortgage, even if this is part of your IVA terms. For example, your credit history or general market conditions might stop providers lending to you. Or, your financial circumstances may have stayed the same or got worse during your IVA, in which case you would be unable to afford the added burden of increased mortgage payments.

Your IVA terms will set out in advance what will happen if you’re unable to re-mortgage as planned. In most cases, your IVA will simply be extended by 12 months. Your normal payments will continue for an extra year, so your creditors will still receive some of the money they were expecting from a re-mortgage or equity release.

6. If I can’t re-mortgage, will my debts still be written off at the end of the IVA?

Yes, provided that you make all your monthly repayments on time and stick to the IVA’s other terms. Even if extending your IVA by a year doesn’t pay your creditors as much as if you’d been able to re-mortgage or release equity, this won’t stand against you. After the IVA has ended, any leftover unsecured debts listed within it will still be cancelled.

7. Can I re-mortgage earlier than Year 4 of my IVA?

If your situation makes this possible and your IP agrees, yes. Circumstances like getting a better-paid job or co-habiting with a partner can increase your disposable income, enabling you to raise money against your property when this wasn’t possible before. On occasion, this has even enabled people to settle their debts in full and end their IVA early.