As the UK faces an unprecedented cost of living crisis, the Insolvency Service has circulated advice encouraging engagement between debtors in IVAs, their supervisors and creditors in respect of anticipated defaults.
By Christopher Love, Partner and Head of Corporate Recoveries and Insolvency
As news comes that thousands of Britons could cut debt due to new advice from the Insolvency Service, it’s important we understand what this means in practice and why the change has come about.
Christopher Love, Partner and Head of Corporate Recoveries and Insolvency here at Primas, gives his take on the new advice and explains it affects those already with an Individual Voluntary Agreement.
What is an Individual Voluntary Agreement?
“An individual voluntary arrangement (IVA) is a legally binding agreement between you and your creditors to pay back your debts over a period of time.”
“Under normal circumstances, individuals seeking to avoid bankruptcy enter into IVAs, or Individual Voluntary Arrangements, which typically last five years. They commit to making monthly payments to the IVA supervisor, which is based on an annual budgeting exercise as to how much surplus income they have after any outgoings. Inflation and the cost of living crisis, however, will have reduced this surplus, potentially to zero, meaning those in debt could struggle to make their monthly payments.
“It’s essential debtors are able to make their monthly payments, as if they fail to make a payment, the IVA itself could fail and the supervisor could be forced to pursue bankruptcy.
What does the new Insolvency Service update mean?
“As the UK faces an unprecedented cost of living crisis, the Insolvency Service has circulated advice encouraging engagement between debtors in IVAs, their supervisors and creditors in respect of anticipated defaults. The advice has been drafted with the agreement of the signatories of the IVA Standing Committee (“SC”), which recognises that current IVA’s may have been drafted at a time before Nominees had knowledge of the financial climate with rapidly rising inflation and increases in energy, fuel and other household costs.
“For example, an IVA supervisor can ask creditors to agree a change to the IVA to reduce monthly contributions as a result of the debtor’s circumstances – helping the debtor avoid a bankruptcy order as this could lead to a worse outcome for creditors. The IVA supervisor will assess each claim on a case by case basis – reviewing any evidence supplied as to changes in their outgoing payments – eg: food, rent/ mortgage payments, fuel etc.
“Alternatively, a debtor may have received a pay rise or bonus from their employer intended to assist with the cost of living crisis. If this is the case, they will need to ensure that the budget includes the new cost of living changes to avoid being asked for increased contributions as salary increases.
“What’s interesting to note in this case, is that The Insolvency Service were the only party pushing for this to be published at this time. The majority of the volume IVA industry and (privately) the IPA were of the opinion it was not necessary now and that we should wait until energy prices rise again later in the year. The Insolvency Service won the argument and as a result the creditor agents were able to successfully lobby for the guidance to make clear, without being explicit, that Insolvency Practitioners should not seek to recover fees for the work they will have to do.
“A number of creditor representatives have made it clear that they do not want the guidance to be communicated generally to avoid consumers claiming they cannot afford their contributions. This is a fair point as after Martin Lewis referred to the Covid Protocol on daytime television large numbers of IVA consumers sought reductions in their contributions in unjustified circumstances which placed significant strain on the volume providers resources at a very difficult time (home working etc).
“Insolvency Practitioners are, as a result of the political battle between the Insolvency Service and the IPA, relating to the future regulation of Insolvency Practitioners, now going to be subject to additional regulatory scrutiny at a time they are expected to do an enormous amount of additional work without being paid.”
If you’re struggling with debt our Corporate Recoveries and Insolvency solicitors are experts in their field and can offer expert legal advice and guidance in many different areas. Get in touch with Chris today: email@example.com