Why Creditors May Reject an IVA | Rejected Individual Voluntary Arrangement

If you owe money but you’re struggling with debt that you can’t afford to pay off, an Individual Voluntary Arrangement (IVA) is one debt solution that can help you get out of it.

However, if you want to enter into this kind of debt repayment plan, it may not be the easiest to get into especially since there’s a chance that your creditors might take some convincing before they accept it.

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So, in this guide, we’ll look into the reasons why some creditors may reject your IVA petition, what you can do to avoid it, and what your options are if it does happen to you.

Everyone has different financial circumstances and sometimes, it gets difficult to hand. Debt is hard enough to handle much less understand. So, let us give you the debt help you need by helping you look through your IVA options and other debt solutions available.

You have provided incorrect or incomplete information

Transparency between you, your Insolvency Practitioner (IP), and your creditors is the key to successfully get your IVA proposal approved. So, it comes as no surprise that you need to provide the correct and truthful information to get the creditors to agree to this debt managements plan.

Keep in mind that your creditors are people or companies that have had a long-standing relationship with you. As a result, they will require you stay honest and clear with your financial situation. As a result, if a creditor notices that you’re hiding something in your IVA plan or presenting it as something it isn’t, they’re likely to reject it.

It’s up to your IP, who will be chairing the IVA creditors meeting, to inquire about it, although they are not obligated to do so. If they believe they’ve been duped, they’re more likely to reject your proposition outright.

Your past behaviour is deemed unacceptable

Your lifestyle and behaviour are huge factors when it comes to repaying debt by using an approved IVA proposal. Based on their knowledge of your lifestyle, the creditor will study that and use it to consider if the IVA is likely to fail in monitoring. The way the unsecured debts were accumulated in the first place may be examined by a creditor. If you lived a lavish but unsustainable lifestyle for a long time, seemingly unconcerned about whether such lifestyle debts could be repaid, or worse, if you borrowed recklessly knowing that the debts could not be repaid in a reasonable amount of time, a creditor would be hesitant to approve such a proposal.

A creditor must be satisfied that your lifestyle involved chronic addictive behaviour such as excessive gambling, drinking, or drug use and that the insolvency was likely to be due to such behaviour before accepting an IVA debt solution, and that you had taken reliable corrective action or debt advice to maintain and improve the changed and improved behaviour.

In order to gain your creditors’ trust and have them accept your IVA, even if you racked up debt as a result of an addiction such as gambling or substance abuse, you may need to first show that you have taken action to recover or be rehabilitated and have remained in recovery for an acceptable amount of time.

If you owe HMRC money

Regardless of your financial situation or debt level, you may still be denied if you apply for an IVA. If you’re self-employed and you owe HMRC money, your IVA proposal may be denied if you have a history of failing to comply with HMRC’s requirements or acted illegally in the past.

HMRC may, however, accept your IVA request if your returns are accurate and up to date, so make sure you double-check them for errors and submit them on time to boost your chances of acceptance.

Unrealistic budget or payment plan

Personal circumstances can highly affect the way you deal with total debt or how able you are when it comes to tackling the monthly payments of your debt solutions. That’s why we recommend that you get debt help before applying for an IVA. It’s vital that you and your IP assess your income streams (including disposable income) and expenses and come to an agreement as to how you’ll cover your IVA.

So, you’ll need to be honest about what your payment plan will look like if you’re trying to get rid of your debt through an IVA. Your best effort should be to pay off your creditors’ unsecured debts as soon as feasible. As a result, the payment plan you offer to pay off your obligations should be in line with the information you supply about your income and expenses.

It’s critical that you declare all of your monthly income as well as all of your debts to the IRS. There should be no omissions, understatements, or overstatements. You should mention this information in your proposal if you work overtime on a regular basis and this increases your income.

In the same way, the essential living expenses that you mention in your proposal should be realistic as well. If you have a partner in your home, your creditors will expect you to divide the household expenses in a reasonable manner with them.

Your proposal may not be viable for a creditor

Of course, if a creditor believes that if they sign into an IVA with you, the amount they would be paid back by you will be very low, they will reject your offer. If your creditors believe there is no other way you can realistically repay your obligation to them in full, they are more likely to accept your proposal.

You have recent debts

Any creditor regulated by the Financial Conduct authority will have an understood set of rules that they follow. However, their attitude towards you is also influenced by the relationship you have. It’s not unusual for a creditor to reject an IVA if you’re a new customer with a debt that was accumulated within the last six months.

But, if you’ve been a client for a long time and the new debt was just a consolidation of multiple prior obligations with that creditor, they’ll be more likely to accept the IVA because they’ve known you for a long time and are familiar with your financial situation. So, when you apply for an IVA, take the advice of your Insolvency Practitioner since they will know how to best go about getting an approval from creditors.

It’s not the best option for creditors

If debt management plans (DMPs) can be used to ensure that all creditors are paid in full within an acceptable time frame, they may accept your IVA proposals. But the question is what constitutes an acceptable amount of time?

A reasonable duration of time for a DMP may be anywhere from six to 10 years, given that many IVAs are for a term of five or six years. It’s also possible that part or all of the DMP’s interest and penalties will be frozen during its term.

Another aspect is that some creditors prefer the legal structure of IVAs, as opposed to DMPs, which are mainly unregulated, informal, and voluntary.

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All unsecured creditors must be treated equally

As the debtor, you should make sure that any unsecured creditor or unsecured debt claim is included in the IVA plan and that all creditors are treated fairly. Any debt solutions plan in which one creditor, often known as a hostage creditor, attempts to be treated better than other creditors is frowned upon by HMRC. As a self-employed individual, for example, you may have a creditor who supplies you with essential goods or services.

If they are exempt from your IVA and get full payment for all obligations incurred prior to the IVA being granted, that creditor may only be willing to continue doing business with you.

The IVA may fail if and when the IVA supervisor or a creditor discovers the preferential treatment if you fail to declare the liability to the hostage creditor and exclude it from the IVA, fully intending to service that debt covertly.

The creditor may be in the process of securing the debt

Your IVA proposal may be rejected if your creditor has previously taken steps to recover the debt by obtaining a County Court Judgement (CCJ) against you and a charge order against your property. This is due to the fact that a charging order converts an unsecured debt into a secured obligation, allowing them to pursue legal action against you and compel you to pay it back in full. The IVA cannot overturn a charge order that has been given to them, and it cannot be included in your IVA repayment plan.

The creditors’ meeting

A creditors’ meeting will be called when the insolvency practitioner has written your proposal. The creditors will weigh in on the IVA and decide whether or not to accept it. An IVA protocol has been adopted by a large number of creditors. The protocol contains guidance on how to write an IVA proposal. It’s expected that creditors accept a proposal that has been prepared in accordance with the protocol without requesting that it be amended in any way that is unnecessary. Whether or not to accept the proposal will be decided by the creditors.

Are all creditors the same?

In short, not all creditors are the same or alike. It’s true that not all creditors will be as receptive as others. It’s also true that a creditor may take a dim view of a particular IVA and try to prevent it from being accepted on occasion.

Do creditors have to agree to an IVA?

No, for the plan to be adopted, not all creditors must agree. If more than 75% of the creditors who vote or are represented at the meeting vote in favour of the proposal, it is adopted. It’s dependent on the amount of money owing to the debtors. If one creditor is owing 20% of the total debt, for example, their vote is counted as 20% of the overall vote.

Why would a creditor agree to an IVA?

Creditors are aware that a tiny percentage of their customers will have financial difficulties and may be unable to meet their obligations. Although they attempt to avoid losing money as much as possible, they know that it will happen at some point in the future, and they recognise that it will happen.

Creditors are given a detailed explanation of the comparative returns they may expect from both the planned IVA as well as the prospective return from the same applicant’s bankruptcy when faced with an IVA proposal. When opposed to the bankruptcy option, the IVA will normally offer a major financial advantage to the creditor by providing a better financial return over a longer term. Creditors will agree to an IVA as a result of this.

Can the decision made at the creditors’ meeting be challenged?

Yes, it can. Within 28 days of the Chairman’s report being submitted to the Court, the debtor, creditors, nominee, and, in the event of an undischarged bankrupt, the Trustee or Official Receiver, may file an application with the Court to contest the meeting’s decision.

What Should I Do if My IVA gets Rejected?

IVA’s are legally binding and such, a creditor refuse or accept your IVA proposal depending on if it suits them legally. When creditors reject your idea, they may give you reasons why they did not approve it. They may even make suggestions to improve your idea. You then have the option of accepting their suggestions or amending your plan to make it more acceptable to them. If you think this is worthwhile financially and you’re willing to accept the adjustments they make, you can choose this route, and your proposal may be accepted as a result.

So, before you submit your application, it’s worthwhile to talk to your IP about any joint incomes, any reasonable family living expenses or longer period expenses, and how much in monthly payments you can give to cover your overall debt. This way, you’ll have a secure plan which lessens the risk of your IVA getting rejected.

Debt Management Plan (DMP)

Unlike an IVA, a debt management plan from any money advice service is an agreement between you and your creditors that you would make small monthly payments to your creditors and repay your debt over a certain period of time. Although, you should keep in mind that unlike an IVA, a DMP is not legally binding.

You can set up a DMP with your creditor, or you can engage a debt management firm to do it for you. The Financial Conduct Authority (FCA) is the body that regulates and appoints companies.

Debt Relief Order (DRO)

If your total debt is less than £20,000 and your monthly income is less than £50, you can apply for a DRO. Since a DRO lasts for a year rather than a year, it is substantially quicker than an IVA. You must, however, have little to no assets to your name in order to be eligible for a DRO.

Bankruptcy

You might file for bankruptcy and pay off your debts in a much shorter period of time. When you file for bankruptcy, your assets are not protected like they are with IVAs. They can be taken into custody and sold.

Final Thoughts

The top-rated IVA practitioners have low failure rates due to in-depth income and expenditure analysis to check it fits into an Individual Voluntary Arrangement debt plan.

Some of the worst IVA practitioners attempt to try putting debts to the meeting of creditors that will not pass the votes to get the IVA proposal approved.

You can resubmit your proposal if your disposable income checks were incorrect or would like to appeal.

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If you want to know more about the debt help plan of an IVA we have all articles related to individual voluntary arrangements here:

Why Creditors May Reject an IVA Application