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).
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People entering into an IVA whilst their property is in negative equity need to be aware that in the majority of cases future equity cannot be ruled out from being included in the Individual Voluntary Arrangement (IVA). Unfortunately, whilst it may be that equity does not exists at the outset of the IVA, i.e. at the creditors meeting, this does not mean that creditors will forego their right to access any future releasable equity that may develop during the IVA. Instead they will expect another property valuation to be submitted towards the end of the IVA’s 4th year, and a re-assessment of the equity situation to be taken then. The normal IVA equity rules apply, however, with only ‘releasable equity’ to be made available to creditors.
So what are the normal ‘IVA equity rules’? Well, as part of the IVA protocol, an IVA which includes a property with equity that cannot be released at the appropriate time during the IVA because of there being insufficient equity, or there are no lenders prepared to offer a re-mortgage due to their set lending criteria or the costs of re-mortgaging are prohibitively expensive, the IVA will be subject to an extension of 12 months to the IVA’s repayments term. These extra payments will be taken in lieu of the unreleased equity.
If you are in an IVA already and your property is already part of your arrangement, and you are concerned by the falling value of your property, and by the possibility of negative equity, you should refer to your IVA proposal. The IVA proposal will outline what your obligations are to your creditors regarding the equity in your property be it positive or negative.
There will normally be clear guidelines in the IVA proposal that will describe what you can expect to happen, but in normal circumstances, the onus of releasing equity will be removed completely if there’s a negative equity position when the IVA supervisor looks at the value at the end of the 4th year.
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The first point to make is that there are two types of equity - there’s positive equity and there’s negative equity. If a property is in negative equity its resale value is less than any borrowings held against it.
However, in the majority of cases, the equity held in a property will have a positive value. This means that the value of the property is greater than the borrowings against it.
But it is important to note, that 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% - 85%, 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 within 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 IVA proposal. This clause states that in the fourth year of the Individual Voluntary Arrangement (IVA), or sooner if possible, 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, and the other party is not jointly named on any of the debts in the IVA, it is possible to exclude the solvent party and “ring fence” their share of the equity, thus protecting it from the Individual Voluntary Arrangement (IVA).
In a case like this it is necessary to obtain permission from all parties to agree to a re-mortgage at the end of the Individual Voluntary Arrangement (IVA). The success of the IVA at the creditors meeting will be conditional on this permission being given before the IVA is accepted.
One more consideration is where a family home is put at risk due to some long term planning having 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.
Therefore 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 IVA advisers. Or read our IVA articles and download one of our free IVA guides designed to help answer any of your questions relating to debt.
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