COMMENT

A New Way To Get Out Of Debt

By Jane Mack (TMFJane)
March 22, 2006

If you're debt problems are really bad you may end having to opt for either an Individual Voluntary Arrangement (IVA) or bankruptcy.

Earlier this month, the Insolvency Service published details of the new Simple Individual Voluntary Arrangement (SIVA). It's designed to speed up and simplify the process of applying for an IVA and make the programme more accessible to people in debt.

IVAs are becoming increasingly popular with people in severe financial difficulty. By the end of last year, 20,293 people had entered IVAs, an increase of 88.7% on the figures for 2004.

An IVA arrangement usually lasts for five years, during which time an insolvency practitioner effectively takes control of the debtor's income. After agreeing an amount for personal living expenses any surplus is distributed among creditors on a pro-rata basis. When it expires, the rest of the debt is written off.

If an individual enters an ordinary debt management programme they can be tied to it for much longer than five years and there's no guarantee that their home will be safeguarded during this time. Otherwise the alternative is bankruptcy.

The key features of the SIVA will be:

• No lower limit for unsecured liabilities, and an upper-limit for undisputed debts of £75,000.
  
  
• Creditors can vote for approval or rejection by a simple majority (by value) instead of the current requirement for 75% majority by value. They won't be able to propose modifications to a SIVA throughout its lifetime and voting will occur on paper instead of having to hold a creditors' meeting.
  
  
• There will be a restriction of 6 years from re-entry to SIVA process if it fails.
  
  
• There will be no requirement for a minimum dividend. It will be for the debtor and the insolvency practitioner to ensure that the proposal is attractive enough to the creditors who are unlikely to approve a proposal that generates less of a dividend than they would get if the debtor went bankrupt.
  
  
• Fees will not be set in legislation -- a move which has disappointed Citizens Advice who wanted a cap on fees. The Insolvency Service believes that costs will come down anyway if insolvency practitioners don't have to organise creditors' meetings and make modifications throughout the term of a SIVA.

Crucially, although the insolvency practitioner can take the equity of a debtor's home into account, this will only be permitted and must be agreed with the debtor at the beginning of the SIVA. Currently IVAs are routinely modified to take account of rising house prices and so the debtor is often expected part way through the usual five-year run of an IVA to remortgage in order to realise any increase in equity.

The SIVA is expected to become law in Autumn 2007.

Find out more about how to Get Out Of Debt.