IVA Articles
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IVA : Will The Equity In My House Affect My IVA?
The issue of equity in an Individual Voluntary Arrangement (IVA) is a very important one. The fact that there is a property involved alters the terms on which creditors will accept Individual Voluntary Arrangements (IVAs).
The first point to make is that there are two types of equity, ordinary equity and negative equity. If a property is in negative equity its resale value is less than any borrowings against it. Whilst a property is in negative equity it is ruled out of inclusion in an Individual Voluntary Arrangement (IVA) because there are no funds available.
However, the majority of equity is positive. This means that the value of the property is greater than the borrowings against it. This offers the possibility of extracting some of that equity through a re-mortgage which can then be used to repay part or all of your debt.
Not all equity is releasable equity. In order to release equity from a property the lender will normally put in safeguards to protect the money they are lending. This safeguard is known as a "loan to value" (LTV) ratio. This is the ratio between what the property is worth and what borrowings are outstanding on it. Lenders adjust this ratio to fit the credit worthiness of the client wishing to re-mortgage their property, the higher the LTV the more credit worthy the client.
The rationale behind a loan to value ratio is that if a lender advances money on a property they should have no difficulty in recouping their loan because the loan is set at a percentage, usually 75%, of the market value. This gives the lender security in the knowledge that even in a forced sale they are likely to raise all the loan back.
If the property being considered in an Individual Voluntary Arrangement (IVA) has equity that is releasable this equity must be considered in the arrangement. This could have two effects depending on what the value of the debt is and how much equity is releasable.
If the level of equity is equal to or more than the debt an Individual Voluntary Arrangement (IVA) is probably not appropriate because creditors would expect to be repaid using that equity and a re-mortgage could be the answer. However, if the level of equity only part repays the debt creditors would want that equity to be considered in the Individual Voluntary Arrangement (IVA).
It works in this way. The Individual Voluntary Arrangement (IVA) is proposed in the same way as an arrangement without any property involved except that a clause is added to the proposal. This clause states that in the fourth year, or sooner if possible, of the Individual Voluntary Arrangement (IVA) the Insolvency Practitioner will seek to release the available equity to finalise the arrangement by paying off the part or all of the outstanding debt.
Another point to consider with property in an Individual Voluntary Arrangement (IVA) is a property in joint ownership. If the person subject to the Individual Voluntary Arrangement (IVA) is a joint owner in a property but the other party is not included in the debt, it is possible to exclude the solvent party and "ring fence" their equity thus protecting it from the Individual Voluntary Arrangement (IVA). In a case like this it is necessary to obtain permission from both parties allowing a re-mortgage at the end of the Individual Voluntary Arrangement (IVA) before the arrangement is approved.
One more consideration is where a family home is put at risk due to long term planning gone wrong. The legal owner of a property is the person or persons whose name is on the title deed.
If that person falls into debt, their creditors are entitled to claim that property or force its sale to recover debt owed to them. This can cause all sorts of problems and may seem unfair. It is extremely important to think carefully when signing over property to offspring to avoid inheritance taxes etc.
When you own property and you are considering an Individual Voluntary Arrangement (IVA) it is crucial that you are well informed about how the Individual Voluntary Arrangement (IVA) will affect your property. For a detailed but informal consultation about these matters call 0800 088 7503 and speak to one of our specialist advisers. Or visit our specialist IVA websiteat myIVA-Adviser.com and download one of our free guides designed to help any of your questions relating to debt.
