IVA Protocol

The Insolvency Act of 1986 established IVAs as a viable alternative to bankruptcy. They were initially intended for persons with complicated financial affairs — company directors, traders, and those with an extensive portfolio of assets.

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Currently, over 80% of cases involve consumer debtors who are employed and have some equity in a home. Such cases are easier to manage and do not require the same level of rigour as the initial regime.

Concerns that IVAs are being mis-sold have grown as cases have increased since 2003. However, the main drivers are the same as for bankruptcies: credit availability, economic considerations, and unique reasons relating to the individuals involved, such as illness or a relationship collapse.

In this article, we will talk about what a protocol-compliant IVA is and what a straightforward consumer IVA protocol can expect of the IVA process.

What is the IVA protocol?

An IVA is a formal, legally binding arrangement between you and your creditors to repay your obligations over time. An insolvency practitioner must set it up. When establishing and managing an IVA, all insolvency practitioners must adhere to a set of guidelines.

Most insolvency practitioners and creditors have signed up to a voluntary code of practice known as the IVA Protocol. The protocol’s goal is to ensure that the processes involved in an IVA are transparent and equitable. For all simple consumer IVAs, the protocol establishes a uniform format.

The protocol establishes a uniform procedure for:

  • the proposal content
  • the income and expenditure assessment
  • how equity in the home is dealt with
  • terms and conditions included in the IVA

If you have a regular income and at least three debts with two or more creditors, you will be eligible for an IVA under the protocol.

When was the IVA protocol introduced?

Since early 2008, IVA Protocols has been in operation. The protocol’s goal is to make it easier to handle simple consumer IVAs quickly and efficiently. The protocol acknowledges that the IVA serves a legitimate public policy goal by providing debt relief to people in financial difficulties.

Why was the IVA protocol introduced?

The Insolvency Service established a working group in 2004 to investigate potential IVA amendments. Some would necessitate legislative changes, while best practice protocols might accomplish others. SIVAS is the name given to the legislative amendments (Simple IVAs). A Legislative Reform Order will be used to implement the amendments.

General principles

Scope of the protocol

The protocol is a voluntary agreement between insolvency practitioners and creditors that establishes a consistent structure for consumer IVAs.

Insolvency practitioners and creditors agree to follow the steps and paperwork when a protocol IVA is offered.

The protocol does not take precedence over the legal and regulatory framework that insolvency practitioners must follow.

The protocol consumer IVA

A protocol for consumer IVA can be for any time, although most will be for 60 or 72 months. Someone who is a good fit for a protocol consumer IVA is likely to:

  • receive a consistent and reliable source of income, such as from employment or a regular pension
  • have a variety of credit cards or debts
  • have assets that aren’t very complicated

The consumer’s age and debt level should not be a barrier, but they may impact the overall feasibility and acceptability of any proposed IVA. It is widely understood that an IVA is a statutory-mandated process that necessitates the completion of specific tasks and may incur costs unrelated to the debt and the number of creditors involved in the IVA.

Consumers with very low debt levels are unlikely to benefit from IVAs. Consumers who qualify for a debt relief order (DRO) could not be eligible for an IVA. The suitability of an IVA for consumers with debts under £5,000 should be considered. The reasons why the consumer chose an IVA over other available debt relief or settlement options should be fully recorded in the proposal.

It is vital to have a consistent source of income. There is nothing stopping consumers who are self-employed or work irregular hours from using this approach. Still, when income is uneven or uncertain, this should be noted in the proposal.

Vulnerable consumers

Vulnerability does not exist in a vacuum and can occur at any stage during a consumer’s lifetime. Insolvency professionals should consider that conditions may alter during the IVA’s duration.

Insolvency practitioners should ensure that they follow their regulator’s most recent published instructions on dealing with vulnerable consumers. The FCA guidelines serve as a guide for people who provide debt advice to clients who may be susceptible.

In the case of a vulnerable consumer, insolvency practitioners should make appropriate arrangements to ensure that the consumer understands the IVA procedure, its impacts, and obligations and makes suitable plans to meet their requirements.

This may include liaising with third parties on their behalf with their permission. The consumer’s explicit consent is required to disclose and record vulnerabilities, particularly those related to health and mental well-being.

Creditors may consider any vulnerabilities when assessing an IVA proposal if they thoroughly understand the consumer’s circumstances. Creditors should follow any published regulatory instructions or standards on dealing with vulnerable consumers.

Transparency by all parties to the IVA

Any previous contacts with the insolvency practitioner who is the prospective candidate for the IVA, or firms or affiliates affiliated with the proposed nominee, should be disclosed. If the customer has attempted to obtain an IVA or had an IVA granted in the preceding 24 months, they should declare it.

Suppose the consumer has previously been or is now in a Debt Relief Order, Debt Management Plan, or Bankruptcy, or has been subject to a Bankruptcy Restriction Order or Undertaking. In that case, they should additionally provide this information.

A third party may have directed the customer to the nominee. Suppose a third-party lead generator or debt packager refers IVA leads to the insolvency practitioner. In that case, the insolvency practitioner should direct the consumer to seek assistance from an FCA licensed individual, or the nominee should advise the FSMA exclusion.

Advice and cooperation

The nominee shall conduct proportionate investigations and verifications into:

  • earnings and outlays
  • obligations and assets
  • accurate financial information submitted by a consumer to a lead generator, debt packager, or any other third party to ensure that all information provided

The insolvency practitioner should assess and document the following factors when determining whether an IVA is a realistic debt solution for the consumer:

  • whether the consumer’s circumstances are expected to change during the IVA’s duration based on the facts provided
  • income sources
  • ensuring the consumer’s financial statement is an accurate picture of the consumer’s monthly outgoings when using the Money and Pensions Service’s Standard Financial Statement
  • alternative potential debt solutions, as well as the consumer’s reasons for opting for an IVA over any other viable options

In addition to complying with other legal requirements, the insolvency practitioner should make sure that:

  • Consumer treatment is essential to the culture of any firm where the insolvency practitioner works, and debt advice, information, and explanations are useful and appropriate for the consumer’s specific circumstances;
  • The nominee provides clear information to both the consumer and creditors when crafting the proposal, as well as the supervisor during the IVA;
  • Consumers have no hurdles to filing a complaint against the insolvency practitioner, any entity that employs the insolvency practitioner, or anyone else involved in putting together or operating the IVA proposal; and
  • Consumers must be informed about the Insolvency Practitioner Complaints’ Gateway as soon as possible, and it must be appropriately posted on the insolvency practitioner’s or firm’s website.

Financial statement

The candidate should collaborate with the customer to create a budget that appropriately reflects the consumer’s income and expenses and the rest of their household, if applicable. When a budget is only agreed upon for one person in a home, the nominee’s report to creditors should explain why this is the case and why the debtor and insolvency practitioners believe IVA is still a feasible choice.

If creditors request it, the nominee should make efforts to verify the integrity of all of the facts provided in the IVA proposal and give specifics on that evidence. When there is no way to prove a position, it should be brought to the creditors’ notice and documented in the IVA file.

Where the individual is self-employed, the nominee’s report should include a declaration that they have verified the income and expenditure and details of the means utilised. The nominee must define the scope of the papers and keep a record of them. This includes copies of any P60, payslips, bank statements, and other income and expenditure evidence.

Homeownership

There should be no circumstances in any IVA where the consumer is a homeowner, whether solely or jointly with others, where the consumer is forced to sell their home or a portion of it instead of potentially releasing equity into the IVA unless the consumer’s proposal provides for a voluntary sale of their home.

The equity clause’s objective is to outline the insolvency practitioner’s actions in dealing with the consumer’s home and estimate any equity available for creditors’ benefit when preparing the proposal and included in the IVA. Following references to property should be interpreted as referring to the consumer’s home or a portion of it.

If the consumer decides to sell their home during the IVA’s term, the proceeds of the sale -net of reasonable selling and moving charges — will be paid into the IVA, but only to the extent necessary to pay creditors in full, as well as the IVA’s costs, excluding statutory interest.

Option 1 – 60-month term

Suppose the consumer’s equity is equal to or less than the de minimis amount of £5,000. In that case, an IVA should be recommended with a 60-month term and no necessity for a property value reassessment. To be clear, the amount considered de minimis refers to each consumer, and it is £10,000 or less when an interlocking IVA with a jointly-held property is envisaged.

A 60-month IVA does not include a property revaluation or a computation for equity release or remortgage. Creditors should be informed that the proposal prohibits the release of any available equity into the arrangement.

Option 2 – 72-month term

The IVA will be proposed based on a 72-month term with no requirement for a further review of the property value if the value of the consumer’s equity exceeds the de minimis amount of £5,000. It is unlikely to result in any equity release being viable because the consumer is unlikely to be able to remortgage or obtain a secured loan.

A 72-month IVA that does not suggest any equity release will not contain a property revaluation or an equity/remortgage calculation. Creditors should be informed that the proposal prohibits the discharge of any equity into the IVA.

The insolvency practitioner should inform the consumer that because there will be no further review, the period of their IVA cannot be lowered, even if their property value changes unless a variation meeting agrees to such a reduction.

It will be impossible to amend the parameters of the proposal without creditor consent. The consumer will be obliged to pay into the IVA for 72 months regardless of their equity position at a later date while the IVA is still in effect.

Option 3 – 72-month term with a review

A remortgage or secured loan can be used to unlock equity. A new calculation review will be done at month 54. or the review date’ if the consumer is compelled to release equity.

The customer should work with the supervisor to determine the new equity position. This will include the production of up-to-date balances for any secured borrowings, mortgage redemption expenses, any other debts secured against the property, and another valuation by the consumer, which the insolvency practitioner will check.

The insolvency practitioner should direct expert brokers to assess the amount of equity available and find appropriate equity release providers and products with the consumer’s consent. This should be determined by the consumer’s mortgage affordability and the lending criteria and constraints. The supervisor’s introductions to specialist brokers must follow the Insolvency Code of Ethics’ section on agencies and referrals.

Suppose the value of the property, and thus the available equity, has decreased significantly at the time of the equity review and is either below the de minimis value calculated based on 85% of the property’s value or an amount that would not be suitable for release of equity-based on mortgage affordability. In that case, the consumer will not be required to attempt to release any equity but will be required to pay an additional 12 months into the IVA arrangement.

Completion of the IVA

When the customer has made all agreed-upon payments into the IVA and has fully met all other requirements, the IVA is considered completed. Once all final activities have been completed, the insolvency practitioner will provide a completion certificate to the consumer and notify all creditors as soon as practicable after payment has been made.

A completion certificate should be issued as soon as possible after the insolvency practitioner has finished the last acts, preferably within three months after the final payment. Still, if this is not possible, it must be issued within six months.

If a consumer offers to creditors a full and final settlement variation that is agreed upon, the IVA will be terminated. When the IVA arrangement is terminated, or the insolvency practitioner issues the completion certificate, the trust constituted by the IVA arrangement will be extinguished.

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Are the self-employed excluded from the protocol?

No. The most crucial issue is that the debtor’s income can be verified and predicted. Again, you should make the source of the money crystal clear in the proposal.

Is the protocol designed to be used by insolvency practitioners who do a lot of IVAs?

Both yes and no. REGARDLESS OF VOLUME, any IP that deals with IVAs can use the protocol. All practitioners, especially those who deal with modest numbers of IVAs, should benefit from the methodology because it uses standard terminology and other elements to avoid “reinventing the wheel.”

Will creditors always abide by the protocol?

Yes. Agents for creditors have declared that they will follow the orders of their principals, who, if BBA members, have likewise stated that they will follow the process.

Will creditors always accept protocol compliant IVAs?

Yes, in theory; however, it may be best to wait and see in practice. BBA members “are required to abide by the rules of the protocol,” according to the letter of support.

However, creditors may have other information about the debtor that indicates ‘errors’ in the plan, prompting them to reject it or request changes to the suggested costs.

What can I do if I’m not happy with the protocol?

If you are unhappy with your IVA protocol, you should first speak with your insolvency practitioner. They are in charge of ensuring that the protocol is appropriate for you and appropriately managed.

Will QAD reviewers always check if I have used the protocol?

Possibly. The reviewers will choose a representative selection of your instances. This may include some ‘protocol’ cases, in which case the reviewer will continue to work as usual. The critical aspect is that if the IVA paperwork indicates that the protocol was utilised, the reviewer will double-check that the protocol’s terms were followed.

Do non-BBA members follow the protocol?

Possibly. The protocol is used to communicate between IP addresses and BBA members. Although the BBA represents the majority of creditors, there may be times when you are dealing with a proposal where a creditor is not a BBA member. Non-BBA members will be considered for inclusion by the standing committee.

Were insolvency practitioners involved in the development of the protocol?

Yes. The Insolvency Service hosted two ‘open’ meetings with a total attendance of about 150 persons. Representatives from creditor organisations and IPs were invited. In turn, four working groups were formed to address various parts of the protocol, with IPs represented in each.

Will the standing committee remain involved?

Yes. One of the tasks of the standing committee, as previously stated, is to keep the protocol’s wording under review. It will also work on strategies to provide better market information regarding IVAs. It will also evaluate how the protocol is implemented in practice and receive reports of ‘non-compliance.’

Has the Coronavirus impacted the IVA protocol?

The IVA Standing Committee recognises that the COVID-19 epidemic may directly influence a consumer’s situation and that some persons may be unable to meet their duties under their current IVA terms. Furthermore, the pandemic may impact the long-term viability of any new arrangements.

But will the protocol even work?

The IVA Standing Committee will monitor the procedure. Everyone concerned understands that debt has a price tag. Over-indebtedness causes the debtor stress, suffering, and family breakdowns, all of which cost the economy. IVAs are widely recognised as effective debt relief instruments.

They provide better returns for creditors than bankruptcy and provide closure and relief for debtors. The protocol can ensure that debtors have access to an IVA if it is the best option for them and make those instances more visible and consistent.

Where can I find more details on the IVA protocol?

The protocol is a voluntary code, which means it is founded on mutual trust and understanding. It’s fair to say that there was a lack of trust amongst the various stakeholders when this process began.

On the other hand, many people have put in a lot of effort and gotten a deeper knowledge of others’ perspectives through various meetings and working groups.

Click here to get more details about the IVA protocol.

Summary

Over 130 delegates from creditors, advisers, IVA providers, insolvency practitioners, regulators, and academics discussed the best practice improvements during an IVA forum in January 2007.

Four working groups were organised to investigate various topics. In May 2007, they reported back to another forum, deciding to create an IVA protocol.

The IVA protocol and its supporting documents have been agreed upon by representatives from all of the essential parties, and they provide the foundation on which we may rebuild confidence.

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