Lump Sum IVA
A Lump Sum IVA is the phrase used to describe an IVA that lasts for just one payment.
Also known as a Full and Final IVA, the Lump Sum IVA has become a valuable weapon in the arsenal of an IVA adviser.
Lump Sum IVAs are quite uncommon because the circumstances that need to exist before a Lump Sum IVA actually becomes a viable solution are really quite rare.
Understanding Lump Sum IVAs
When an IVA applicant puts an IVA proposal in front of their creditors, it should represent the 'best' offer they can make to creditors, repaying as much of their debt as they can afford.
Normally the 'best' return would be generated through 5 years of regular contributions into the IVA fund. In addition, homeowners must promise to release a proportion of any equity through a remortgage before the end of year 4, further increasing the amount being repaid.
However, in cases where an applicant's household budget is in complete balance, with no disposable income available to contribute towards the IVA payments, the contribution based IVA ceases to be an option. And this is where a Lump Sum IVA can sometimes become an option.
How does a Lump Sum IVA work?
Rather than being based on the standard 60 monthly contributions, a Lump Sum IVA provides a chance to make an offer to creditors consisting of a single 'one-off' payment.
This works particularly well when the IVA applicant has a friend or family member prepared to act as a benefactor, or equally, when they own a property which can be sold or remortgaged to raise the funds.
Either way, so long as the applicant can generate a 'lump sum' similar to that which creditors might have received via 60 monthly contributions, then creditors can be persuaded to accept the single payment as a Lump Sum IVA.
When does a Lump Sum IVA become a viable option?
The grounds for a Lump sum IVAs occur most frequently when an applicant's ability to maintain a regular income has been removed.
Retirement tops the list, where people might want to use their retirement package to tidy up their finances before retirement.
Closely followed by redundancy. People often consider Lump Sum IVAs when they have been made redundant, where they want to use their redundancy package to clear their debts in one fell swoop, particularly when the amount they owe greatly exceeds the amount they can offer.
Also, Lump Sum IVAs are popular when people downsize their property and use some of the released equity to settle their debts.
Another regular occurrence is when 3rd party funds are made available to the IVA applicant, with parents providing the funds to settle their offspring's debts being particularly popular.
How effective is a Lump Sum IVA?
Fortunately the Lump Sum IVA still carries all the standard advantages of the regular contribution based IVA.
It's still legally binding on all creditors, once the sufficient majority of creditors have agreed to accept it, as well as providing the guaranteed debt write-off of all remaining outstanding balances.
The main difference is being that the Lump Sum IVA is instant. Once the funds have been paid the applicant is legally debt free straight away.
Why do creditors accept Lump Sum IVAs?
Creditors view the Lump Sum IVA as a 'bird in the hand' option, which provides a guaranteed financial return, greater than the return they could expect by forcing the applicant to take the bankruptcy option. So all in all, not a bad option for them really.
Another big advantage of the Lump Sum IVA is the significant reduction in the IVA fees that the creditors have to pay.
This is because the IVA only needs to be supervised by the insolvency practitioner for 1 year, rather than the normal 5 years.
But what makes the Lump Sum IVA particularly unusual is the fact that there is such a narrow range of circumstances where it works.
Why not just go bankrupt?
In the interests of a balanced view point, it should be highlighted that in the majority of cases where an offer of a Lump Sum IVA using 3rd party funds is an option, the applicant would actually be financially better off declaring themselves bankrupt.
There's little doubt that in these cases, bankruptcy would offer the quickest and cheapest way to become debt free, not to mention stopping the need for 3rd party money being passed to creditors.
But it's for exactly this reason that creditors will be interested in a lump sum offer.
So, if there is any reason why someone would want to avoid bankruptcy and would, instead, prefer to offer their creditors a Lump Sum IVA, chances are their creditors will be listening.
It's, therefore, simply a matter of personal preference as to which option to take to debt freedom.
Professional IVA Advice
The team behind My IVA Adviser are Lump Sum IVA specialist.
If you would like to discuss your circumstances with an adviser to see if a Lump Sum IVA is a suitable solution for you, please call 0800 088 7503.
Alternatively, complete this form and one of the team will call you at your preferred time.