Thursday, May 3, 2012
Mortgage Queries That Can Develop within an IVA
By Ella Cain
When an individual goes into an Individual Voluntary Arrangement (IVA), they are making a formal agreement with their unsecured lenders to pay off a percentage of their liabilities for a limited amount of time. The length of an IVA is five years most commonly but it could be shorter when, for instance, the debtor offers unsecured creditors a 'one-off' lump sum payment. The cash might come from the sale of the debtor's property or it might be money offered by the debtor's family or friends explicitly to enable him or her to pay back the money they owe. However, most IVAs are based on monthly payments coming from the debtor's disposable earnings for a period of five years. The question comes up, how does the person in debt deal with secured creditors?
Secured creditors expect to be paid, during the time period of the IVA and afterwards, the full contractual repayments on secured loans made to the person in debt by them. A mortgage is a secured debt and so is a Hire Purchase agreement. A debtor who has a mortgage or who has obtained a vehicle via a HP agreement is expected to make their regular mortgage repayments to their mortgage company and also to make their car HP payments in full and on time, irrespective as to how the unsecured obligations are being dealt with in the IVA. The IVA offer sets out in detail how much the unsecured lenders are to be paid back and over what period of time.
Unsecured lenders normally obtain settlement of just a part of the debts within the time period of the IVA. The money they obtain is termed a dividend. For instance if a quarter of the unsecured liabilities are to be repaid in the IVA, the dividend is said to be 25p in the . The size of the dividend can vary. It just is determined by what the borrower can afford to pay and what the unsecured lenders are prepared to agree to. Only some unsecured creditors exercise their right to vote when deciding whether to agree to or reject a debtor's IVA proposal. Of the unsecured lenders who choose to vote, at least 75% of them as calculated in 's, must consent to accept the IVA offer before the IVA can come into being. Unsecured creditors who don't vote are still bound by the final decision of those that do. In practice the dividend will frequently come within the region of 20p in the to 40p in the , though of course it can sometimes be much below that range and at times higher, even up to 100p in the . In a very few cases, unsecured creditors can actually receive 100p in the and indeed they may also be given statutory interest in addition.
So when a person offers proposals for an IVA, unsecured creditors are not bound to consent to the proposal. If they reckon that the person in debt can pay in excess of the money proposed in the beginning, then they can suggest modifications to the IVA which will normally have the effect of increasing the amount of the debtor's monthly contributions or they can seek to extend the time period of the IVA by an additional six months or maybe more. The debtor can of course decline to agree to such modifications and in that case the IVA offer will most likely be rejected. On occasion, lenders may be amenable to moderating their demands for enhanced payments but that would be the exception and would only happen if they could be credibly convinced that the person in debt cannot really afford the additional payments and that the proposed modifications would be likely to lead to the failure of the IVA in supervision and prior to completing the full duration.
If the borrower has a mortgaged property, unsecured lenders will not forget about that reality. They will check out the up-to-date value of the property and the amount of money that the person in debt presently owes to the mortgage provider. The borrower is asked to supply a current, true and fair market valuation of the property and also a recent mortgage redemption statement from their mortgage provider. This type of statement would indicate the all inclusive costs of paying off the mortgage, including any early redemption charges which might be applicable. By using these two bits of data, unsecured creditors can quickly find out if there is any realisable equity in the property. When there is, the unsecured creditors can, by way of modification to the IVA proposal, require the person in debt 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 properly constructed IVA proposal should already include a provision for re-mortgaging the property and giving equity to creditors. However, it could be that re-mortgaging isn't an alternative for the debtor for the reason that no mortgage company will take them on due to their bad credit history or as a consequence of the present contraction in the mortgage market due to the economic collapse. Even if the borrower could negotiate a re-mortgage, they may possibly be forced to pay premium mortgage rates.
If there is no equity in the debtor's property, unsecured lenders will take into account the amount of the monthly mortgage repayments. If they are too much, lenders might propose a modification to the IVA requesting the person in debt to sell the property and move to rental housing. The explanation is that the expense of rental housing would be a great deal less than the monthly mortgage costs and the person in debt would be able to raise their contributions into the IVA by the amount of money saved each month. As a yardstick, mortgage payments that exceed 40% of net family earnings would normally be considered to be exorbitant.
In recent times, property values have dropped sharply, and many individuals learn that their property is in adverse equity. This simply means that the cost of redemption of their mortgage is greater and in some cases substantially higher than the existing market value of the property. If required to sell, the shortfall due to the mortgage company would become a further unsecured debt and so would rank for dividend with the other unsecured creditors, and consequently lower the dividend in an IVA.
The debtor's partner or spouse can have an equitable interest in the property. More often than not that interest is 50% of the equity. The debtor's family members may also have rights of residing in the property which could make a mandatory sale complicated for creditors, at the very least. In summary then, an IVA can certainly impact the debtor's mortgage but the good thing is that in most cases, debtors will not lose their house in an IVA.
When a debtor is pondering whether to enter into an IVA and is anxious that it could possibly have an effect on their mortgage, they should initially talk to an Insolvency Practitioner, also called an IP, for advice. A reputable IP will look at all of the debtor's personal circumstances and will advise him or her on all of the possibilities available, without usually charging for this kind of early guidance. Alternatives other than an IVA might incorporate petitioning for bankruptcy or if the person in debt is not insolvent, entering into a Debt Management Plan (DMP) and there could be other solutions accessible also. The borrower can decide on the best choice for themselves in the light of the advice given by the IP. If there is property like the family residence involved, the borrower and their spouse or partner also need to get independent legal advice so that the rights of all parties are protected.
Secured creditors expect to be paid, during the time period of the IVA and afterwards, the full contractual repayments on secured loans made to the person in debt by them. A mortgage is a secured debt and so is a Hire Purchase agreement. A debtor who has a mortgage or who has obtained a vehicle via a HP agreement is expected to make their regular mortgage repayments to their mortgage company and also to make their car HP payments in full and on time, irrespective as to how the unsecured obligations are being dealt with in the IVA. The IVA offer sets out in detail how much the unsecured lenders are to be paid back and over what period of time.
Unsecured lenders normally obtain settlement of just a part of the debts within the time period of the IVA. The money they obtain is termed a dividend. For instance if a quarter of the unsecured liabilities are to be repaid in the IVA, the dividend is said to be 25p in the . The size of the dividend can vary. It just is determined by what the borrower can afford to pay and what the unsecured lenders are prepared to agree to. Only some unsecured creditors exercise their right to vote when deciding whether to agree to or reject a debtor's IVA proposal. Of the unsecured lenders who choose to vote, at least 75% of them as calculated in 's, must consent to accept the IVA offer before the IVA can come into being. Unsecured creditors who don't vote are still bound by the final decision of those that do. In practice the dividend will frequently come within the region of 20p in the to 40p in the , though of course it can sometimes be much below that range and at times higher, even up to 100p in the . In a very few cases, unsecured creditors can actually receive 100p in the and indeed they may also be given statutory interest in addition.
So when a person offers proposals for an IVA, unsecured creditors are not bound to consent to the proposal. If they reckon that the person in debt can pay in excess of the money proposed in the beginning, then they can suggest modifications to the IVA which will normally have the effect of increasing the amount of the debtor's monthly contributions or they can seek to extend the time period of the IVA by an additional six months or maybe more. The debtor can of course decline to agree to such modifications and in that case the IVA offer will most likely be rejected. On occasion, lenders may be amenable to moderating their demands for enhanced payments but that would be the exception and would only happen if they could be credibly convinced that the person in debt cannot really afford the additional payments and that the proposed modifications would be likely to lead to the failure of the IVA in supervision and prior to completing the full duration.
If the borrower has a mortgaged property, unsecured lenders will not forget about that reality. They will check out the up-to-date value of the property and the amount of money that the person in debt presently owes to the mortgage provider. The borrower is asked to supply a current, true and fair market valuation of the property and also a recent mortgage redemption statement from their mortgage provider. This type of statement would indicate the all inclusive costs of paying off the mortgage, including any early redemption charges which might be applicable. By using these two bits of data, unsecured creditors can quickly find out if there is any realisable equity in the property. When there is, the unsecured creditors can, by way of modification to the IVA proposal, require the person in debt 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 properly constructed IVA proposal should already include a provision for re-mortgaging the property and giving equity to creditors. However, it could be that re-mortgaging isn't an alternative for the debtor for the reason that no mortgage company will take them on due to their bad credit history or as a consequence of the present contraction in the mortgage market due to the economic collapse. Even if the borrower could negotiate a re-mortgage, they may possibly be forced to pay premium mortgage rates.
If there is no equity in the debtor's property, unsecured lenders will take into account the amount of the monthly mortgage repayments. If they are too much, lenders might propose a modification to the IVA requesting the person in debt to sell the property and move to rental housing. The explanation is that the expense of rental housing would be a great deal less than the monthly mortgage costs and the person in debt would be able to raise their contributions into the IVA by the amount of money saved each month. As a yardstick, mortgage payments that exceed 40% of net family earnings would normally be considered to be exorbitant.
In recent times, property values have dropped sharply, and many individuals learn that their property is in adverse equity. This simply means that the cost of redemption of their mortgage is greater and in some cases substantially higher than the existing market value of the property. If required to sell, the shortfall due to the mortgage company would become a further unsecured debt and so would rank for dividend with the other unsecured creditors, and consequently lower the dividend in an IVA.
The debtor's partner or spouse can have an equitable interest in the property. More often than not that interest is 50% of the equity. The debtor's family members may also have rights of residing in the property which could make a mandatory sale complicated for creditors, at the very least. In summary then, an IVA can certainly impact the debtor's mortgage but the good thing is that in most cases, debtors will not lose their house in an IVA.
When a debtor is pondering whether to enter into an IVA and is anxious that it could possibly have an effect on their mortgage, they should initially talk to an Insolvency Practitioner, also called an IP, for advice. A reputable IP will look at all of the debtor's personal circumstances and will advise him or her on all of the possibilities available, without usually charging for this kind of early guidance. Alternatives other than an IVA might incorporate petitioning for bankruptcy or if the person in debt is not insolvent, entering into a Debt Management Plan (DMP) and there could be other solutions accessible also. The borrower can decide on the best choice for themselves in the light of the advice given by the IP. If there is property like the family residence involved, the borrower and their spouse or partner also need to get independent legal advice so that the rights of all parties are protected.
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